Finance a business
There are various ways to finance a business, the following are the more common methods:
Friends and Family
The traditional starting point for most start-up businesses. Advantages are ease of obtaining the finance, disadvantages are that it is likely to be limited unless you have some high net worth individuals in your family.
Bank Loan
The traditional funding route from High Street banks, either unsecured or more typically secured against assets of the business (or by personal guarantee of the directors). Could be guaranteed by the government through the Enterprise Finance Guarantee in certain situations.
Grants
Covered extensively on our grants page.
Business Angels
High net worth individuals who take a shareholding in the business and generally take an active management role as well. Angels tend to concentrate on a specific geographic area and/ or industries. As an angel will take an equity stake in the business this is only suitable for Limited Companies and not sole traders/ partnerships.
Venture Capital
Similiar to angels but in this case the equity stake is taken by a Venture Capital company (or Venture Capital trust) who manage funds on behalf of their shareholders. Investment requires a strong business proposition with high potential returns and a clear exit route for the VC within a 3-5 year timeframe. Generally not worth pursuing unless you are looking to raise £2m+ although the government (and RDAs) has been proactive in setting up regional VC funds to address the sub £2m market and specific industries (also Enterprise Capital Funds).
Mezzanine Finance
A combination of debt and equity finance that allows the lender the option to convert their loan to an equity stake in the business. The debt finance (loan) will generally be unsecured and the interest rate will be higher than a bank loan.
Debt Factoring
Basically a system in which a business' invoices are sold to the factoring company who then assume responsibility for collecting the debt. The factor will typically advance up to 85% of the invoice value to the business. Debt factoring is a complex and should be considered a longer term arrangement but can be a useful way to improve the business' cash flow.
Invoice Discounting
Similar to Debt Factoring but the business retains control over it's sales ledger. Again a useful way of improving cash flow, generally only available to businesses that sell goods/ services on credit and to businesses with at least £500,000 annual turnover.
