The business landscape in the UK is more radical today than it has been in the past, with the country recording growth in the population of small and medium enterprises and new start-ups. Starting and running a business in the UK, therefore, is an exciting experience, especially when there are increased growth opportunities for your business. However, most entrepreneurs are devastated when it comes to financing their businesses in efforts to fuel their growth. The financing phase of establishing a business can be difficult when you cannot figure out how you will finance your business
Although the funding landscape has been unfavourable for most businesses, with bank funding opportunities growing dimmer, there exist more alternative sources of financing for your business. Here is a guide on everything you need to know about business financing.
What is Business Finance
Business finance is the money or credit raised by a business to carry out its routine operations with efficiency and effectiveness. All the existing forms of business finance are classified into two major categories, which include equity finance and debt finance.
Equity finance is the raising of funds via the selling of business shares to shareholders who invest their money into your business. In addition to money resources, these investors may also inject creativity, skills, professional knowledge, and business networks. In return, these investors will have a share of the company’s profits and other forms of gains, such as interests. They also have some control over the running of the business.
Debt finance, on the other hand, is the raising of funds by borrowing money from money lending institutions or individuals, with an agreement to repay the money later with a defined interest. This repayment is agreed upon by you and your lender on whether it will be done in a lump sum or instalments. Debt finance contrasts with equity finance in that, money lenders do not get a share into the company’s profits or interests.
How to Finance Your Business
You already know that there are numerous financing options for you to choose from. However, before you go for any of the financing options to fund your business, there several important things that you need to consider;
Calculate the Amount of Financing that your Business Needs
There is a lot that you would want to do to see your business scale to heights of growth. You will, however, need to calculate the exact amount you need in order to achieve specific business goals. You must also have in mind that what you get as funding is what you afford to repay.
Ensure that you have a Clean Credit Report
Having a good credit rating influences how easy it is for you to access business financing from investors and lending institutions. This is because investors and lenders tend to evaluate the borrower’s ability to repay borrowed money before they can secure finances for their business.
Know the Source of Finance that Best Suits your Business
Based on your business needs, you should be able to determine what type of financing will best meet those needs. Evaluating the pros and cons of each source of financing will give you an advantage of getting business finances at a cheaper cost and with ease. For example, sometimes borrowing from friends might be the best option for your business, which is easy to access without much hassle.
Get the Right Investors
Finding the right investors ensures that what you get for your business is not only money but also networks and expertise. It is easy to have your growth plans landing on the right investors if your financial projections in your business plan are tangibly convincing. Investors want to see how your business will benefit them in terms of Return on Investment.
Be Confident with your Business
Getting finances for your business is not always guaranteed, at least not instantly. You might struggle in securing business finances for the first few times, but you must not give up. When you have confidence in what your business has to offer, there are higher chances that you will come across the right investors for your business.
Sources of Business Financing
There are numerous financing options that are available for your business. These include;
You can start your business or finance business growth using your savings if you have some. The good thing with starting a business with your own money is that you will not get your business off the ground on debt or with an early-stage equity financing. Most investors will translate the use of personal savings to start or grow a business as a sign of commitment.
Commonly known as angel investors, these are wealthy individuals who invest money into a business as an investment in return for a share into the company. For angel investors, you will not be required to repay the amount that the investors fund your business with. Instead, they benefit from your business through Return on their Investment (ROI).
The government of UK, through different bodies and agencies, provides a variety of business grants to small businesses across the country. Grants are non-repayable amounts that are issued to businesses that qualify after making business grants applications. Often, these grants are availed in relation to government agendas such as development, research, and business empowerment. Although grants are not repayable, businesses must adhere to strict guidelines and criteria to qualify. For business owners who cannot finance their businesses with their own savings or by inviting investors, then it would be a good idea to start looking for government grants to finance their businesses. This would be a cheaper and a more convenient way to fund their businesses.
Finances from Family and Friends
Soliciting for finances from family members and friends is the cheapest and the most flexible source of business funding. This is because the repayment time and interests are based on mutual understanding and their interest to support your business. Family and friends can trust you with their money more quickly than other lenders would do.
However, this form of financing has some demerits too. Sometimes it is a difficult thing to mix business and family. When repayment is faulted as per the agreement, family relationships and friendships could be at stake. You should, therefore, establish a formal contract to ensure that the borrowing is governed by specific principles.
This is a source of finances where businesses solicit for money from a large number of people pulled together via specialist online platforms such as Crowdcube and Kickstarter. In return, these people get shares, early access to goods and services, or discounts from the funded business. It can be difficult, however, to raise the required amounts of money for your business, with tens or hundreds of businesses competing for attention to be funded. Although getting finances through crowdfunding is that difficult, the little amount you get can keep several operations of your business running.
Start-up loans are a common source of funding for most small businesses. These are accessed from banks and other financial institutions and are repaid after a certain period with interests. For secured loans, the lending bank will require you to use collaterals such as business assets or property as security for the loan. Access and repayment of start-up loans will depend on bank policies and the circumstances surrounding the borrower such as creditworthiness. Before seeking a start-up loan, you need to confirm that your credit rating is impressive enough to acquire a loan sufficient to fund your business operations. Talk to the lending institution to identify the different types of business loans available and the repayment terms, before committing to their loans.
Bank overdrafts are the most suitable source of finance for funding of day-to-day operations of a business, which your business could be stuck in, such as payment of wages. Overdrafts are quick and flexible. Interests on overdrafts are charged on the money you overdraw. However, interests on these overdrafts are charged beyond the standard base rates, and they are repayable on demand.
Other sources of funding include invoice financing, peer-to-peer lending, community schemes, asset financing, bootstrapping, venture capital, and cash advances.
How to Apply for a Business Loan
Different lenders have different requirements when it comes to servicing a business loan. Whether it is a bank or alternative money lenders, the criteria are almost similar when evaluating the loan application process. Most lenders employ the CAMPARI framework before validating a loan application. CAMPARI is an acronym for Character, Ability, Means, Purpose, Amount, Repayment, and Insurance.
The loan application process is simple and straightforward. In this application process, you will be required to submit details such as follows;
Financial Information for your Business
Lenders will scrutinize the financial information provided in your business plan to determine the experience of the business in matters finance. Other lenders will demand that you submit your personal statements to determine your creditworthiness. Through the business information documents you avail to the lending institution, they will determine the amount of money they will lend you according to the performance of your business. If your business has not been doing well, there is a higher likelihood of not getting a huge amount of loan.
How Much Loan do you Want?
You should be clear on the exact amount that you intend to borrow and how you intend to use it in growing your business. Most lenders will want to see how much you have put into the business as well before they qualify you for a business loan.
In addition to identity documents such as your ID, there are other documents that you will be required to submit to the lender. Such documents include a business plan, bank statements, tax compliance certificates and records, profit and loss statement, licenses and permits, and business-related records.
Provision of Collaterals
When borrowing secured loans, especially for large amounts, most lenders will require you to present assets that you would want to act as securities for the loan you intend to borrow. These assets include stock, equipment, equity, and business property.
Once you have submitted these details to your lender, your loan eligibility will be evaluated. If the lender finds you eligible for the business loan, communication will be made and the loan processed to your account. Different lenders take different timeframes to validate a loan application process.
Why You will Need a Loan Broker for Your Business
Getting a loan from a lender is not easy, especially when you do not have the required collateral secured to acquire the loan. Lenders find it hard to trust start-ups and individuals with an unreliable capacity to service repayment of a loan. This is why you will need a loan broker for your business.
Most people do not trust loan brokers because they know little about how they operate. A loan broker does not provide you with the loan that you need. Rather, they act as the intermediary between individuals interested in business finance and the various sources of finance. Loan brokers are governed and regulated by the Financial Conduct Authority (FCA), a UK government agency. Through FCA, loan brokers are expected to adhere to strict regulations in their exercise, guaranteeing businesses professionalism and integrity.
The following are more reasons why you will need a loan broker for your business;
- Most loan brokers are experts in various financing options.
- A loan broker evaluates your borrowing needs and matches them with reliable financing options.
- Loan brokers have direct access to offers, services, and solutions that different lenders offer.
What Next after Successful Loan Application?
After your loan application has been validated, and money deposited into your account, you are obliged to strategise on how to manage the use of that money and the loan repayment. This is to ensure that you remain in a competitive position of securing another loan in the future.
Some of the strategies to employ include the following;
Development a Repayment Plan
Your lending experience in the business landscape is not complete without the repayment of money borrowed. Having an effective repayment plan not only builds your credit report but also secures you some future opportunities with your lender.
Maximising on Repayment Opportunities
To ensure that you are par with your repayment capability, you might consider making double payments in one event. This will minimize the chances of missing out on any instalment.
Let the Money Serve the Purpose for Which You Borrowed it
You must ensure that you swiftly begin to execute financial plans for which you borrowed the money. This will help you to achieve your business goals as well as build on your return on investment for the money. If well used, the borrowed money could bring yields that repay the loan in good time.
How to Choose the Best Financing Option for Your Business
You now know the available financing options for your businesses. Each option, though, has its pros and cons. You may be wondering what criteria to employ when choosing a financing option suitable for your business.
Here is an outline of factors you should consider when choosing the best financing option for your business;
The Cost of Finance
Any form of borrowing has extra fees that you will be required to pay for in addition to loan interest and the principal amount. Such charges include the application fee, processing fee, late payment fee, origination, and check processing fees. Your lender should provide you with an Annual Percentage Rate (APR), which reflects the total cost of acquiring a business loan. You should go for a financing option with a total cost of loan acquisition that your business can afford.
When you intend to invest the borrowed money into long term projects such as building a factory plant, you should consider picking financing options that are long term in nature. Such options include long-term loans, equity financing, and government grants. On the other hand, when the money is required to service short-term obligations such as the purchase of an asset and stock replenishment, then financial options that are short term in nature could be the best choices. Such options include family loans, overdrafts, and start-up loans.
The Amount Being Borrowed
Some financing options are best suited for large borrowing while others are suitable for small borrowing. If you intend to borrow large amounts of money, you should then go for financial options that have extensive capabilities to finance such loans. Such financing options would include share capital, asset financing, and invoice financing.
The Size and Nature of your Business
If your business is large in size, and you can borrow large amounts of money secured with collaterals, then borrowing from banks and financial institutions could be the right option for you. However, if your business is small and operates on a relatively small scale, then it would be prudent to borrow from flexible sources such as friends and family loans, crowdfunding, and savings.