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Susan Field, president of the London Society of Chartered Accountants at the Institute of Chartered Accountants in England and Wales, details the funding options to help start-ups get underway and existing businesses grow. Starting and growing a business can be a very rewarding experience, but one in three businesses close within three years of starting up. You can enhance your survival prospects by ensuring that you have sufficient finance to see you through those critical early stages. Chartered Accountants assist many start-up businesses and can be invaluable in assisting with the financing process, as well as providing ongoing advice as the business progresses.
1. Start-up and early stage finance
Your own funds / friends and family
Personal funding of a new business may come from any shares that you have, personal savings, money released from personal assets or from re-mortgaging your home. Asking for finance from your friends and family may be a sensitive issue that can test your relationships but people who know you personally may be more supportive, particularly if they also have run a business themselves.
Bank overdrafts and loans An overdraft is generally a short-term facility, usually restricted to supporting the needs of working capital (cash required for day-to-day business operations). A loan can provide a longer term solution but banks can sometimes be reluctant to loan large amounts of money to start-ups with no track record. They may also expect you to generate a share of the capital yourself.
Small Firm Loan Guarantee Scheme For UK businesses with annual turnovers of less than £3million (£5 million if you are a manufacturer), the government will guarantee up to 75% of a loan from a bank or other financial institution, subject to the borrower having a satisfactory credit rating.
Leasing and hire purchase
When acquiring assets such as vehicles and machinery, options other than an outright purchase can help free-up more working capital. Leasing your assets (where you effectively hire the assets from a finance company) can provide some tax benefits. Long term leasing however, can mean that overall costs can exceed that of an outright purchase. Another option is Hire Purchase (HP), which enables you to purchase the asset on credit (with interest) paying off the cost over a specified period of time.
2. Growth stage finance
Invoice discounting For growing businesses, invoice discounting makes cash available to you from an invoice discounting firm on receipt of a debtors invoice. The collection of payment from the debtor remains with you. This facility is suitable for partnerships and limited companies selling goods or services on credit to other businesses and can be a cost effective alternative to overdrafts and bank loans.
Factoring
Similar to invoice discounting, factors buy your trade debts and typically pay you as soon as they receive a valid invoice. The factor directly collects the debt from your customer but will usually agree collection policies with you. Invoice factors and discounters advance around 80-90% of your invoice value depending on aspects such as industry sector, turnover, customer numbers and existing credit controls.
Asset finance Asset finance is a loan which is secured on the assets being purchased. Throughout the term of the loan, ownership of the assets is retained by the lender. Such finance is generally restricted to assets which have a determinable residual value at the end of the borrowing period.
3. Equity finance
As a business grows, it may require capital to finance further expansion. The following would provide more appropriate types of financing for such a purpose.
Business angels A business angel is an individual who may invest in your business in return for a stake in your company. They are best attracted if you can show that your business can offer an attractive return but you must be prepared to relinquish some control. Business angels will also want a seat on the Board and to receive regular updates on the company's progress.
Venture capital
Venture capitalists, who tend not to fund start-ups, provide finance for growing businesses in exchange for a significant stake in the company. As professional investors, they can bring significant financial and management expertise which may make it easier to attract further funding. As venture capitalists rarely make investments below £500,000, you will need to have made significant progress with your business already, be able to demonstrate that it has the potential for sustained growth and show that you have a sound management team to move the business forward. Bear in mind that if things go wrong they are likely to intervene to protect their investment. Potential equity investors or loan finance providers will require a business plan showing forecast profit figures, cashflow and projected balance sheets. A Chartered Accountant will be able to give you advice on raising finance and work with you to prepare a business plan.
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