How to Finance a Business

Raising finance in economic times such as these is a difficult task. In this article I outline in simple terms six methods for raising the sort of finance needed to get your business the support it needs.

The Entrepreneurial Economic Engine

In difficult economic times such as this, jobs are scarce. With unemployment rising, many of us are not as secure in our occupation as we used to believe. One way to bypass the risk of being made redundant is to take the plunge and start your own business. Entrepreneurs are the backbone to every economy and are the engine of progress. We've all got ideas, and some of us have ideas that are actually feasible (mine: instead of sun glasses we use sun-contact lenses - no more panda eyes!). One of the major stepping stones to starting a business is obviously finance. How do you finance your business if you have little or no savings?
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Raising Finance

  1. Family and Friends: the safest and least pressured method of finance. Obviously there is no need for a credit check with family and friends. Ideally you would need to have a contract written by a solicitor to cover all circumstances. Just a little warning: relationships may be strained if there are problems paying back the money. Make sure you are able to pay the money back on time.
  2. External Investment: these are wealthy individuals, angel investors (investing clubs) or venture capital firms looking to gain equity in start-ups (think Dragon's Den). Obviously you will be forced to give up a portion of your business and thus a share of future profits for the funding. However you may also gain a business partner and mentor.
  3. Debt Finance: Duncan Bannatyne (Dragon on the BBC program Dragon's Den) is famous for financing one of his early business venture's with £30,000 of credit card debt. He was that confident that he could pay the money back before he would be charged interest that he was happy to take on that level of high interest debt. Of course this sort of financing relies on your confidence to be able to pay back the funds and can sleep at night knowing you have that level of debt.
  4. Bank Loans: This is one of the most typical forms of finance. You need a good credit rating nowadays to be able to take a loan from the bank. Furthermore you will need to demonstrate a good business model and may have to put up your own house, or other assets as collateral.
  5. Factoring and Invoice Discounting: Let us say that you've started your business and have taken orders but are having cashflow problems. Factoring involves selling invoices to a third party debt factoring company to release fast cash against your sales ledger. Of course this sort of financing is not free money. You firm will be subject to a credit check and a review of your financial situation. You will pay a discount charge, a little like an interest charge. This could be anywhere between 1.5-3% above base-rate. You will also pay a management fee, usually 0.75-2.5% of turnover.
  6. Revenues: Obviously the ideal situation is to fund development in a business through revenue. This of course assumes that the business was able to be set up in the first place. Either this method or funding through family and friends is always preferable over debt of any form.
Readers, are there any other methods for gaining finance in your business that I have not covered here?

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