Sources of Funding

sources of funding

IN THIS ARTICLE

Whether your business needs help with day-to-day cash flow, funding for a significant purchase, or money to fuel expansion plans, there are many different sources of funding available to businesses. The initial challenge will be to decide which finance option best suits your needs and eligibility.

In this guide, we delve into some of the possible sources of funding for you to consider.

Personal savings

If you’re starting up a new business, you may find it difficult to borrow from a bank or attract other investors if you don’t invest your own funds. Using your personal savings is the simplest and most cost-effective approach to supply your own finance for a new business.

However, depleting personal savings is risky and you may not have sufficient funds to meet all your expenses. If your business fails, you also risk losing your home and other personal belongings.

Bank financing

Banks are the traditional go-to for business funding and typically offer a range of options, including:

Unsecured business loans

Unsecured business loans are a simple method of borrowing money, with fixed repayments, including interest, over a predetermined time period.

Loans tend to be more suitable for medium- to long-term objectives.

The amount you can borrow and the interest rate will depend on your circumstances and the specific bank.

Secured business loans

Secure loans can be used against certain company assets, such as property or equipment. This can be a useful method for raising funds for operating capital or investment.

Secured loans typically give a lower interest rate than unsecured loans, while unsecured loans allow you to borrow without putting collateral at risk.

The amount you could borrow depends on the asset’s market value.

Commercial mortgages

If you’re looking to purchase or refinance commercial real estate, you may have access to a variety of products, such as buy-to-let loans for businesses and commercial mortgages.

Overdrafts

Overdrafts can be helpful in providing financial support to your business when it needs it most, although they are generally better suited for day-to-day expenses than for funding expansion ambitions.

Overdrafts are typically agreed to be unsecured, but secured overdrafts can be used for higher amounts.

Bridging loans

Bridging loans tend to be used for short-term cash injections, allowing businesses to finance the gap between a purchase and putting in place a longer-term source of finance.

Bridge loans usually have terms of between 1-24 months and can be used for many different uses, such as buying, developing and refurbishing properties.

Invoice financing

Invoice financing allows you to access cash tied up within outstanding invoices. This funding solution can be ideal to improve cash flow if you have extended payment terms or to help fund business expansion and plans.

Options include invoice discounting, which is when a company borrows against their outstanding invoices, and invoice factoring, which is when the business ‘sells’ the invoice to a thrid party who then collects and owns the debt.

In practice, invoice factoring is often a better fit for larger corporations, whereas invoice discounting tends to be more suited to smaller companies wanting to improve cash flow without customers being aware of the relationship with the lender.

Asset finance

Asset Finance can be an effective method for preserving money and generating revenue from an asset while making payments.

It enables you to spread the cost over a period of time through regular payments and eliminates the need to use vital working capital to pay the entire amount up front.

Government-backed financing

At any one time the Government offers businesses a range of grants, schemes and initiatives to help with securing vital funding.

In particular, there are a variety of government awards for small businesses, which are administered by a number of separate organisations. Most are tied to specific activities or sectors, such as research and development and tech, and while they do not have to be paid back, you must meet stringent eligibility requirements.

Loans from family & friends

You could ask family and friends for assistance with company capital, but there are pros and cons to consider.

One of the primary advantages may be repayment flexibility, in addition to giving additional financing over and above what you can borrow more formally elsewhere – as long as you are able to service all the repayment obligations you have made.

However, you and your investors must understand the commitments being made. A lack of clarity of the terms of the loan can be damaging to your personal relationship. Take professional independent advice before comitting to an arrangement with anyone you know personally, and get a formal and well-drafted agreement drawn up and signed by all parties to help avoid confusion or misunderstandings.

External investment

Offering equity or a share of your business in exchange for an investment from a third party could be an effective method of raising capital. In contrast to a bank loan, you may not be required to make repayments on the money invested.

While this sounds appealing, bear in mind that so-called Angel Investors and Venture Capitalists can demand a substantial stake in your company in exchange for their investment.

Angel investors are wealthy individuals with a background in business or finance who invests in companies. They are involved in multiple businesses and tend to offer investment up the hundreds of thousands of pounds.

Typically, they receive a share of the company in exchange for their investment, and as a result, they tend to take a greater interest in the firm, frequently utilising their knowledge and expertise to boost the performance of the company in which they have invested.

Venture capital is financing granted for an equity stake in a firm with the potential for substantial growth. Typically, venture capitalists invest within the first three years of a company’s inception, at its early stages of development, and tend to focus on tech and innovation businesses.

Alternative investments

New sources of business funding have emerged in recent years from outside of traditional finance system.

Crowdfunding is when businesses raise small sums of money from a large number of individuals using web platforms. In exchange for the cash contributions, businesses may offer a variety of incentives such as early product access, discounts, or stock holdings in the company.

Crowdfunding can be used for purposes ranging from funding a small project to launching a new business. However, it can be difficult to successfully crowdfund for your business as there are so many brands competing for attention and exposure.

Peer-to-peer lending combines elements of traditional lending and crowdfunding, with specialist online platforms enabling businesses to obtain loans backed by numerous small investors. The conditions for borrowing may be less stringent than those of traditional banks, and you may be able to borrow more money and receive it more quickly. However, costs are not always cheaper than they would be for a conventional bank loan.

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or tax advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal advice should be sought.

Author

Sources of Funding 1
 | Website

Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.

Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.

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