Business needs finance. That is a fundamental fact of life.
Many businesses need to regularly seek external financial assistance for one reason or another. That’s as true for the SME as it is the vast multi-nationals.
Just where businesses searching for funding find success, depends largely upon their status and the reason they need a capital injection.
To prepare the ground, it’s worth bearing in mind that there may be two main generic finance options for business. You’ll be considering:
- debt finance – essentially meaning borrowing and loans of one form or another;
- equity finance – usually taken to mean selling a percentage of your company’s equity (typically in terms of shares) to an investor who might also require some degree of control over your development in the short to medium term.
Start-Ups
As a start-up or new company (here, we’ll take that to mean any business with less than 2 full years’ trading history) your business is likely to be perceived as “risky” to lend to – i.e. by potential providers of debt finance solutions.
It doesn’t matter how good things have been to date or how innovative your commercial proposition is, you’re not going to have much to show by way of demonstrable proof of your profitability over time.
As a result, you may find that solutions based upon equity finance are more appropriate than those related to debt finance.
Equity finance is often heard of in the context of “Business Angels” or related organisations. A Business Angel is usually a wealthy individual or a collection of such, who invest their money into early-stage commercial concerns.
They’re usually willing to take more of a chance than a traditional lender but as touched on above, they’ll also typically require a higher return and some control to reflect the greater risks they’re taking.
Approaching a Business Angel isn’t usually just a question of phoning up for an appointment. Many will only consider what they might term “curated proposals” – in other words, propositions that have already been vetted for credibility by one of their approved agents.
How much control a Business Angel might require over the company they’re investing in varies. Some may seek a relatively small percentage of the equity in the business and play a very much hands-off role. Others may seek larger percentages based upon their assessment of the risk/rewards involved and require active daily engagement in decision-making etc.
Established businesses
If your business has an established track-record as evidenced by a history of formal accounts, debt finance options for business might be more attractive.
There are multiple forms of such borrowing including things such as:
- funding the purchase of capital equipment;
- business expansion;
- short-term bridging finance (e.g. if you have temporary cash-flow issues to resolve);
In some respects, these finance options for business aren’t dissimilar to personal borrowing in terms of what you’ll need to qualify. Typically, that will include:
- some years of annual accounts that indicate the overall profitability and balance sheet stability of your business. This essentially tells potential lenders how much they can safely lend to you and be relatively sure they’ll be able to get their money back;
- a cohesive and professional-looking proposal/rationale. This should ideally include a justification that the money is required for positive reasons, say business expansion, rather than simply trying to prop up a failing business for another period before the inevitable happens;
- some indication that the proposer, usually the business owner or a key director, clearly understands the overall financial status of their business as it stands. They must be perceived to be in full control or some potential lenders may be dissuaded from going further.
It’s often prudent when considering finance options for business, to get some advice and guidance in advance on how to approach Business Angels or lenders.
