From the very start, any business needs a certain amount of working capital. As the business begins operations and (hopefully!) generates revenue from its activities, a regular source of finance is obtained in what accountants call retained earnings.
There are times in the normal course of trading, however, when additional funding may be required – perhaps to spur the business into further growth, to seize the opportunities presented by new markets, or to finance a particular project. Here is a quick guide to the most common forms of business finance:
- Your personal funds – this may have been the way you got the business off the ground in the first place, and it may be tempting to try to meet any additional need for funding in the future from your own resources, too. Clearly, though, there are limits to what you may be able to afford, and considerable risks if things begin to go wrong for the business;
- Angel investors – these may be individuals, syndicates of individuals or even companies, willing to invest in your company for a share of the profits or a share in the company itself;
- Charities and local authorities – on occasion, depending on the nature of your business, you may be able to attract investment by charities or local authorities;
- Banks – traditionally, banks have been a major source of business finance, offering overdraft facilities and loans, the latter typically secured against some part of the company’s assets. Since the beginning of the current economic crisis, however, many businesses in the UK have spoken about the difficulties of arranging finance from such sources;
- Peer to peer lending – as an alternative to seeking loans from banks, this source involves raising the necessary funds from a collection of individuals or a single individual, depending on the amount that needs to be raised and the resources of the individuals concerned. Each contributor receives interest on the amount he or she has lent;
- Invoice financing – this is a way of using the value of your sales invoices to raise finance from a third party. You may find more details at smallbusiness.co.uk, but in simple terms it involves copying your sales invoices to the third party invoice finance agent. The agent then advances to you up to 95% of the total invoice value. You receive the remaining 5% value of the total invoices and retain responsibility for the sales ledger (along with any debt collection procedures);
- Loans from other business finance providers – certain experts in business finance also arrange loans. Typically, short-term business loans may be available for repayment periods between a few months or up to two years and range in value from £1,000 up to £50,000. Arrangements such as this commonly have the distinct advantage of being completed as quickly as during the course of a single business day, with the requested funds transferred directly into your company’s bank account within a matter of hours.
There are a number of ways in which businesses raise finance for their operations and the above represent just a selection of these. The one that might be suitable for your own company, of course, depends on your particular needs and requirements.