From time to time, almost any business may find itself in the position of needing to raise finance.
Today there are numerous finance options for business available in the marketplace for doing so. In fact, there are so many that a brief article of this nature can’t cover all the business finance solutions available.
What can be explored though is the fact that the options you face may be dictated to some extent by the nature of your business. Here we will look at two broad categories of such lending – debt and equity finance.
Equity finance
If you are a new business, then you may find yourself in something of a dilemma.
The problem might be that you understandably have very little real trading history behind you to show that your business is successful and the risks of lending to you are therefore manageable.
As a result, new enterprises often look for what is called “equity finance”. This typically involves asking investors to inject money into your business in return for a share of it. That is usually done in the form of issuing shares or other financial instruments and that gives investors not only a direct share of your company’s profits but also, to some extent, a degree of say over how your company is run.
There are various ways of doing this, and perhaps the most familiar is the now widely-known “Business Angel” funding mechanism.
The very basic principle here is that as a new enterprise you are asking people to advance you money and take a much higher risk in doing so, given your lack of track record. As such, they will expect a higher return to compensate them for the greater risk they are taking.
Debt finance
This is perhaps more conventional.
It involves applying to an organisation for one form of loan or another. You will then repay the money advanced, over time, in line with a repayment schedule that you will have agreed with the lender or lenders concerned.
To secure debt finance, you will typically need to be able to show at least two years of relatively successful trading history. That will generally need to be in the form of recognisable formal accounts and preferably ones which have been signed off by a certified accountant.
Although the banks were once a significant source of this type of lending, in the last 15 years or so, they have been joined by new entrants. The new entrants may be able to offer a broader range of more flexible products – and also perhaps be able to respond more rapidly to your needs.
Generalities
In both of the above categories, lenders or investors may be somewhat more receptive to a business case that’s positive (e.g. growth related) as opposed to those which have an air of trying to salvage a failing business. Therefore your business proposition will need to be sound and well prepared.
It might also be worth considering what is called “asset re-finance”. This is essentially another form of borrowing which involves you leveraging existing assets that your business owns. For example, capital plant might be something you can raise a loan against, using the item as security.
In conclusion, keep in mind that investors or lenders will expect to see a proposition which clearly indicates that you understand and are in control of your business. If you’re unsure how to go about providing such, it might be advisable to take advice from an expert on how to go about preparing your case.
