Sources of Finance
The most suitable finance option for your business depends on many things: whether or not you’re willing to sell shares; the amount of funding required; business size; available security. There are three main sources of business finance:
The best source of business finance is your own resources or that obtained from family and friends, most other providers require some form of match funding.
Equity finance involves selling part of your business (‘shares’) to an investor.
- you won’t have to pay any interest or repay the loan,
- investors can bring new skills and opportunities to the business, e.g. marketing or legal expertise
- you share the risks of the business with your investors
- you’ll own a smaller share of your business. Although your share could be worth more money if your business succeeds.
- you may have to consult your investors before making certain decisions
Crowdfunding is a growing and popular source of raising finance and involves a number of people, each either investing, lending or acquiring convertible options. Your idea will usually be showcased through a crowdfunding website, examples include www.seedrs.com & www.kickstarter.co.uk
You borrow from a bank, family or friends and repay over an agreed length of time with interest.
- loans are not repayable on demand
- loans can be tied to the lifetime of equipment or other assets you’re borrowing the money to pay for
- banks are not a good source of business finance especially for start-ups.
- loans aren’t very flexible and there may be charges if you repay early
- you might struggle to meet monthly payments if your customers don’t pay you
- if your loan is secured against your personal property you could lose it if you don’t keep up the payments
An overdraft is a credit facility you agree with your bank, it is designed to cover short-term financing needs.
Invoice financing is where a third party agrees to buy your unpaid invoices for a fee. The advantage of invoice finance is that it can provide a flexible and quick boost to your cash flow. A disadvantages is cost, invoice financing can be an expensive source of finance.
Leasing and asset finance
Leasing or renting assets (e.g. machinery or office equipment) can save you the initial costs of buying them outright. See www.abfa.org.uk
A grant is an amount of money given to an individual or business for a specific project or purpose. The most common source of grants are the Welsh Assembly Government, local councils and charities.
- you won’t have to pay a grant back or pay interest on it
- you won’t lose any control over your business
- the application process can be slow and time-consuming
- there’s a lot of competition for grants
- you’ll usually be expected to match the funds you’re awarded,
- expenditure incurred before funding approval is not eligible for support.
There are a wide range of grant funding available to businesses. Example of available grants include:
- LIF Cymru South East Wales is a flexible financial support scheme delivered throughout the South Wales Valleys. It is designed to support a range of small and medium size enterprises. Funding is aimed primarily at the manufacturing sector and associated services. Funding from £1,000 up to £10,000 is available, based on up to 40% of the eligible project costs. Eligible capital projects could include:
Development of websites
External and internal building works and alterations
- Two very popular schemes run by the Welsh Assembly Government which help cover the cost of employing staff include: ‘Jobs Growth Wales’ and the ‘Go Wales’ scheme.
In seeking grants from all these various providers it is important to have a well documented business plan, in addition to improve the chance of success you should have:
- A developed product or idea
- A good team of people who can deliver the business plan
- Financial commitment in terms of match funding of the additional finance required.