Once you have set your goals and decided upon how best to achieve them, you will need to turn your attention to the financial impact business growth will have on your business. This will involve calculating any additional costs such as new assets, marketing literature, additional premises etc and also looking at the cashflow impact on your business.
You will need to draw up flexible forecasts capable of carrying out ‘What if…’ calculations and these should be used to determine the amount of funding required. The following is a summary of how this funding can be met:
The company may have been very successful and built up enough reserves to meet the projected costs. This is the cheapest way to finance growth however do not forget to factor in future costs such as tax bills as once the cash has been spent it will not be available to cover these.
This can be in the form of an overdraft or bank loan. Banks will usually look to finance assets by way of a loan whilst working capital can be financed through an overdraft facility. Banks will usually look for some form of security before offering any finance. This may take the form of a personal guarantee or a debenture over the business assets (or even both).
The possible availability of grants should always be explored when looking for business finance. There are many different organisations which make grants available to businesses. Some are dependent on location or for specific purposes whilst others may only be offered to businesses in certain trade sectors. Most government grants require you to match the funds you are being awarded.
This involves selling your invoices to a third party. In return they will process the invoices and allow you to draw funds against the money owed to your business – typically up to 85% of an invoice value will be sent to you once the invoice has been processed by the factoring company. With factoring, the factoring company will take control of your sales ledger and become responsible for collecting the debts. When your customers pays the factoring company the remaining balance of the invoice will be sent to you.
Invoice discounting is similar to factoring however, your business retains control over the administration of your sales ledger.
If assets are required to fund your business growth then you may be able to lease these. Generally leasing assets requires a smaller deposit than borrowing funds via a loan or hire purchase agreement and monthly payments will be set at a lower lever. However bear in mind that you will never own the asset and will have to continue to pay for it whilst ever you use it.
This is not a loan but the person providing the finance becomes a part owner in the business, who may or may not be involved in the running of the business. It is important to fully understand the terms of the arrangement with an equity partner. It could be by giving shares in your Limited Company or by a partnership arrangement.
The British Venture Capital Association www.bvca.co.uk represents companies offering venture capital. Apart from finance, the venture capital firm provides strategic support to the business, often with a seat on the board.
It is generally a higher risk type of investment where the Venture Capitalist is probably looking for a 300-500% return on their investment over a 4 to 5 year period. The amounts tend to be for over £100,000. Most investments take the form of equity capital.
Business Angels are private individuals who invest on their own or sometimes as part of a syndicate for larger amounts. They rarely have a connection with the company before they invest but often have experience of its industry or sector. They look to invest both money and their business expertise.
Business angels usually invest between £10,000 and £250,000 in an investment. Business angels invest across most industry sectors and stages of business development, but especially in early and expansion stage businesses. The National Business Angels Network is a good starting point to find a business angel. A list of their full members is here: https://www.businessangelnetwork.co.uk/national-business-angels-network/