12/02/2015

By Sarah Abrahams, National Investor Manager, GrowthAccelerator, Part of the Business Growth Service

For many growing businesses, accessing finance can be central to making or breaking a company’s success. But with so many sources of finance available, where do you start and which option is right for you and your business’ needs?

Bank Loans

What is it?
Bank finance is the most well-known form of lending – businesses borrow an agreed amount of money from a bank which is then paid back in regular instalments over a set period of time, with specific terms and rates of interest. These loans are usually secured against assets such as property.

Is it for me?
Banks will need evidence from the business that it can service the repayments of the loan. This means they tend to lend more to companies with a strong trading history and healthy earnings compared with start-ups without this track record.

Asset Finance

What is it?
Asset-backed lending involves a company securing finance against an asset or group of assets. This reduces the impact of a single large payment on the cash flow of the business.

Is it for me?
This type of finance is suitable for businesses buying big ticket items such as machinery, manufacturing equipment or vehicles, as the cost can be spread over its useful life. As with a bank loan, the amount of finance available with depend on the business’ ability to meet repayments and the general size and stability of the business and its balance sheet.

Trade Finance

What is it?
“Trade Finance” literally means, finance for a trade transaction. Various intermediaries, such as banks or specialist trade finance firms, can assist companies providing goods or services to a customer by financing the cost, allowing the seller to fulfil the order before they have received payment for it.

Is it for me?
Unlike loans, when it comes to trade finance the integrity of the transaction is usually more important than the strength of a company’s balance sheet. For businesses where cash flow is a key issue, trade finance can be hugely beneficial to free up working capital which can be used for financing other areas of growth.

Invoice Finance

What is it?
Invoice financing is where a third party agrees to buy a company’s unpaid invoices for a fee, giving the business an advance on money owed to them.This provides additional working capital by freeing up cash from unpaid invoices.

Is it for me?
Invoice financing is suitable for businesses that issue a number of invoices to customers and rely on cash flow to pay bills and/or to buy stock. It can work in tandem with, or instead of, an overdraft or long-term business loan, and you can choose to finance your whole invoice book, or just use it as and when needed.

Peer-to-peer Lending

What is it?
Peer-to-peer (P2P) finance involves private individuals lending their own money through an online marketplace to small businesses in need of finance. Investors compete to lend money in an online auction and the lowest bid wins, meaning the company gets the lowest rates possible.

Is it for me?
Businesses are typically able to borrow anything up to £1m for requirements such as working capital, expansion, asset finance or general business expenses. The process is much quicker than traditional loan finance and, if successful, the funds can be transferred to the business within two weeks. Although this type of finance has many benefits, it’s still a loan, so your business will need to prove its credentials and ability to pay the money back.

Crowdfunding

What is it?
Crowdfunding involves individual investors collectively providing finance for a business venture. In return, the businesses give their investors something in return — either equity in the company or a reward as a thank you.

Is it for me?
Crowdfunding is perfect for entrepreneurs with an idea they want to develop, or for very new businesses who want to get off the ground. It works well for businesses with a product or business model that is easy to understand or those that would benefit from generating a fan or customer base through marketing the investment opportunity. Investors need to see potential in the business so anyone considering crowdfunding will need to have a strong business proposition and robust financial forecasts as with any equity fundraise.

Business Angels

What is it?
A business angel is a private investor who invests their own money into start-up and early stage businesses. An individual angel will typically invest between £10,000 and £300,000, but will syndicate in groups to provide finance up to around £1-2m.

Is it for me?
Getting support from a business angel goes beyond just accessing finance. Using their experience of running and growing businesses, angels tend to take a hands-on approach with any business they invest in and are likely to have invaluable business contacts.

Venture Capital

What is it?
Venture Capital firms invest in early-stage companies in return for an equity stake. They will typically invest in companies with early revenues and strong traction, providing finance from £500,000 up to £5m, and often co-investing with other firms. The firm will always take a board position in the business to work closely with the management team on strategy and operational improvements.

Is it for me?
Venture capital is appropriate for businesses that have begun generating revenues and are looking at implementing a strategy to scale the business. The strategic input that Venture Capital firms can provide is invaluable and, as with angel investors, they can bring new connections and contacts.

Private Equity

What is it?
Private Equity fund managers tend to invest in slightly later stage, more profitable companies, which they believe will provide a high capital return in a relatively short timescale, and often take a majority equity stake with a board position to work alongside the management team on performance, strategic direction and operational improvements.

Is it for me?
Private Equity is usually raised by businesses where the main intention for finance is to reduce inefficiencies, find new sources of revenue and to drive the business growth through to exit.