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Posted on 02 May, 2011

The main sources of business finance for small businesses

Small businesses require business funding for differing reasons at different stages of their commercial development.

This includes finance such as start-up funding, working capital finance, growth funding, business innovation finance, transitional finance (downturn) or restructure finance (where the business may be in distress).

The main sources of finance are detailed below:
Personal sources

Many start-ups and small businesses have difficulty obtaining funding of any kind. Self funding is sometimes the only option. This is achieved through savings, loans from family and friends, or personal borrowings.

Utilising an independent consultant to assess business plans, funding proposals and to advise on business loan applications is an increasingly popular course of action to maximise the likelihood of successfully securing the all important finance required.

Banks and finance companies

The most common source of business finance comes from the high street banks in the form of business overdrafts or business loans.

The financial institutions have tightened their lending criteria in the current economic climate and all businesses need to fully aware of how these new circumstances may affect their business.

Automatic renewal of overdraft facilities for example is a thing of the past and the banks now fully assess every lending scenario against their latest lending criteria and conditions.

Banks will now expect to see a business plan for all types of funding requests and will generally always require security of some kind.

The banks now offer a range of additional finance products and have specialist divisions providing services such as invoices finance and asset finance.

Asset based lenders

These are finance companies specialising in advancing funds against new business assets such as commercial vehicles or existing business assets such as stock.

There are many well established independent asset based lenders as well as the high street banks subsidiaries.

Invoice finance companies

Invoice finance is a specific type of asset based lending where the lender advances up to 90% of the value of a business’s outstanding invoices.
There are two main types of invoice finance:

Invoice factoring which is a fully disclosed facility where the factoring      company will normally take charge of the debt and credit control      management.

Invoice discounting which is a confidential facility operating without your      customer knowing where monies are advanced against the total debtor      book value.

Invoice finance a growing sector of the business finance market and is a popular alternative to business overdrafts due to its flexibility and the fact that the facility grows as the business grows.

Specialist finance providers

This is another growing area of the business finance market with new products and suppliers continually entering the market along with a raft of lenders offering funding solutions tailor fitted to individual business circumstances.

Specialist finance products include offers such as:

Merchant finance which advances funds on credit card sales

Payroll finance which advances funds on payroll costs

Sub-prime finance which advances funds in adverse credit situations

Enterprise Finance Guarantee Scheme

This is a Government backed scheme designed to support bank lending where businesses are having difficulty accessing the finance they need.
The scheme is administered through participating lenders which includes banks and other selected financial institutions.

Pensions

Pension backed finance is a little known but flexible and tax efficient source of business and commercial finance.

The pension has to be of a particular type to be utilised as a self investment vehicle to allow funds to be made available to the business. The two main types that can be used are:

Self Invested Personal Pensions (SIPPs)

Small Self Administered Schemes (SSASs)

Private equity funding

This includes private equity finance from wealthy individuals known as business angels, investment clubs and venture-capital firms. The investor will require a return on investment and a planned exit strategy.

It entails the business owner giving up a share of their company but can bring additional benefits such as the experience and expertise of the investor, mentoring and introduction to new customers and routes to market.

Grants

Business grants can be a large source of potential funds for small businesses and new start-ups.

There are billions of pounds of grants and financial available to UK businesses. The business grant system in the UK is designed specifically to assist, improve and develop UK businesses.

BSUK can be contacted on 0845 4597304 or by email to info@business-services-uk.co.uk or visit our website at http://www.business-services-uk.co.uk