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June 15th 2018

Finance options for entrepreneurs

OK so you need to raise money for your venture. What are the main options?

Let's start with bank debt, which normally takes the form of loans, or overdrafts. Loans are typically suitable for medium to long term finance, whereas overdrafts are more suited to financing short term needs, like working capital. Either form of borrowing may be secured - in which case you put up business or personal assets which are forfeit to the lender, if you fail to repay the debt; or unsecured. Secured lending is generally cheaper i.e. lower interest rates will apply, as it's less risky for the lender.

Banks generally will look for some kind of tangible security against any significant borrowing, especially if your business has no track record. They will also look for clear evidence of affordability, so it's important to be sure that your business can manage the debt and meet repayment obligations. A good business plan is essential. In some circumstances your lender can also provide assistance under the Enterprise Finance Guarantee Scheme which is a government-backed scheme to help banks lend to small businesses who do not meet normal lending criteria.

As an alternative, consider peer-to-peer options offered by platforms such as Funding Circle, who may be able to offer better rates in some circumstances.

One advantage of debt finance is that, unlike with selling equity (shares), you are not diluting your stake in the business or giving up control.

Next up, grant funding. We recently wrote an article about Grant support in Orkney, so I won't repeat myself here. Don't neglect wider grant funding opportunities though; bodies such as Innovate UK provide grant assistance for specific activities/ specific industries and may also be worth applying for. The good thing about grants is that they generally don't have to be paid back, though certain conditions normally apply and these can extend for a few years post receipt. On the other hand, grants can be time consuming to apply for, with no guarantee of a successful outcome, so decisions about whether to apply (or seek other sources of funding) need to be made carefully, on a case-by-case basis.

Asset finance is an increasingly popular and useful way to raise funds. Defined narrowly, the term normally refers to raising finance secured against specific tangible equipment, typically plant & machinery or motor vehicles. Hire purchase, finance leases, operating leases and contract hire all come under the banner; all can represent useful ways to finance the acquisition of an essential asset, whilst spreading cash outflows over a longer timeframe. It's important to understand the income/ corporation tax aspects of asset finance as these differ depending on the route selected.

Defined more broadly, asset finance includes all manner of lending secured against a business's assets. Invoice financing, for example, allows companies to borrow against the value of debts due from customers, which can be especially useful where your business offers long payment terms or your customers tend to pay late. It is a relatively expensive form of financing and tends to be available only to established businesses with a good track record of trading and getting paid.

Angel investment can be a good option for companies looking to raise capital during the early stages of life. Investments typically range from £10k to £500k and you will get one (or more) partners on board who will hopefully bring deep experience and great contacts to bear, to help you grow the business. A disadvantage is that angel investment is normally made as equity, so your interest in the company is likely to be diluted at least to some degree - but that's the quid pro quo for getting an experienced angel on board. Equity Gap is one established Angel group.

Crowdfunding is the final option we consider here. Crowdfunding involves raising a significant sum of money from a number of investors, who individually put up small sums, either for equity or in return for other perks. It's a popular method of raising money for high-tech and product-based businesses, but relies on your ability to promote your business. There are many platforms to choose from including Seedrs and Crowdcube.

Before taking any action to raise funds for your business, do seek professional advice from your accountant as there are many traps for the unwary. Contact us today for assistance.

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