What are my Options to Finance my Business?
When you are running a business you will need cash, without it businesses fail.
But not all businesses can generate the cash needed for the plans they have through general trading fast enough. So, what are your options in these circumstances?
An overdraft facility is a short term borrowing solution as they tend to be more expensive. Overdraft borrowings should be short term to cover gaps in cash.
If you are self-employed then borrowing from the Bank is a personal loan and you are personally liable for the repayments. This means the Bank will assess affordability on your own personal circumstances.
If you run a Limited company then depending on the trading history of the business, the Bank may loan on the basis of the business performance and the assets that the business has, if the business is less established then the Bank may ask for personal guarantees which means you would be personally liable for the loan repayments If the business could not repay them. The interest on the loan is an allowable business expense.
Personal loan to the business
Using your own money to finance your business is particularly common for start ups, but not everyone starts a business with a pot of cash to help them.
If you are self-employed then this money is called "capital introduced" and when business is good, you can draw this back again . Because there are no distinctions between you and the business, there are no tax implications for you as you pay Income Tax (& National Insurance) on the profits of the business and these exclude the money you take out.
If you run a Limited company, then it is strongly recommended that a loan agreement is out in place between you and the business noting the amount, the repayment terms (if any) and the interest being charged. Provided this interest is at a commercial rate then it is an allowable expense for the company. Personally, the interest income needs to be declared on your self assessment tax return and any tax payable depends on your overall interest income and personal circumstances. The repayment of the loan has no tax implications for you.
Sometimes, family will lend you the money.This is obviously fantastic, but always ensure the boundaries are clear as to what involvement they can have in your business and the terms of the loan too (interest rate, repayment terms).
If you are self-employed then the loan is to you as an individual. If you run a Limited company, then the info above is all relevant just swap you for kind family member!
Invoice finance is where you get the cash on your invoices more or less immediately. Either the financing company buys the invoice in full from you and charges a fee to you for this. The risk of bad debt either stays with you, or they can take this on but this obviously involves higher charges! Your customers then pay the financing company rather than you.
Or the financing company will advance you a percentage of the invoice and when it is paid the balance is paid. The customer deals with you but pays into a different account.
These arrangements can be beneficial if you have long debtor days (the time it takes to pay after invoices are raised) but if your sales are relatively uniform over the year, the benefit is, in reality, a one off.
There are also finance companies who will let you sell one off invoices which can be beneficial if you have a one off large contract.
This is also referred to as Trade finance. Money is advanced to the business based on the value of a shipment of stock and is secured against the Stock itself with the goods belonging to the finance provider until repayment is made.
This comes in varying forms, from using finance options to buy new business assets, to borrowing money based on the market value of certain assets, this tends to be plant and machinery that may have a value above the value in the accounts.
Thanks to platforms like Kickstarter, GoFundMe and IndieGoGo, crowd funding is more widely heard of. Generally, businesses ask for money for specific projects in exchange for rewards, discounts, or a share in the business. Most platforms operate on the basis that if you do not receive 100% of the amount then it does not go ahead and you don't get the money. For these types of finance raising the presentation of the project and what you intend to use the funds for is key as it's often a crowded market with lots of businesses looking for investment.
Peer to peer lending platforms
Peer to peer lending platforms are becoming more popular due to the tax breaks available to investors coupled with the potential for high interest returns. Sites like Finding Circle, Zopa and Ratesetter get the businesses applying for the loans to ensure the risk is "acceptable" and set the rates payable on borrowings accordingly. Investors can then select who to lend to and the amount they wish to lend ... It is highly likely that your loan will actually be from several people!
Depending on where you are in the country, your age, your business area then there may be Grants available to you. Grants are awarded based on strict criteria and are not relatable but often involve reporting requirements to demonstrate that you are continuing to meet the terms of the grant and are using it appropriately.
Social Enterprise funding
There are some social enterprises who provide financial assistance to start up businesses, again there will be strict criteria to be met to be eligible and reporting requirements to demonstrate that the funds are being used appropriately.
Sometimes, finding an investor to come on-board who has deep pockets can be just what a business needs. Generally, they will want part of your business and so you need to be prepared to give this away to them. But they will often being skills and contacts to you that you won't have had access to previously ... Think Dragon's Den!
We are very excited to say that we will be having a series of blog interviews from businesses who have used the less traditional forms of finance within their business. If you would like to be involved with this then please get in touch via the contact page.
Remember not all options are applicable to all businesses and it's strongly recommended that you seek professional advice. Before looking at raising any form of finance you will need to have your accounting records in order and know how much you need to raise. It should also be noted that some forms of finance detailed above will only be available to Limited companies.