Financing Your Business - part 1
21st February 2020
Things every business needs to know
Are you ready to grow?
If you are, then financing your business is an important part of this.
There are a number of options available, and over the next two blogs I’ll be giving you an overview of what these are, so you’re informed and can start researching in more depth the right option for your business.
To grow you need to invest
Whether you like it or not, growth requires some level of financial investment, which can sometimes feel like a daunting prospect. Before you take the plunge, here are some things to consider:
- How much can you afford to pay back – it’s important to stretch but not over-stretch, so be realistic!
- How quickly do you expect to pay the investment back – again be realistic here! A little pressure can be motivating but too much can cripple you, so find the right balance.
- Do you have anything to borrow against – sometimes it’s favourable for investors if you have something to use as security
- What is your contingency plan – if your expansion doesn’t go according to plan, what will you do? This is why it’s important not to over stretch from the off.
To be able to assess these properly, having a good grip on your cashflow is vital. So take a look at the last twelve months and then put together a cashflow forecast which allows you to see the impact of any borrowing you need (or you can get in touch with us and we’ll help you do this).
There are a multitude of ways you can raise funds for your business, but not all will be possible or feel in alignment with you and what you’re looking to achieve.
To help you make the right decision, let’s have a look at some of the options available.
My top four loans to consider are:
- Directors loan – with this you personally lend to the business. You have control over whether you pay yourself interest or make it interest free. You can also set up a formal or informal repayment scheme for yourself, e.g do you give yourself a monthly repayment or are you happy to pay yourself back as and when? You must consider your personal situation carefully though as there is always a risk to you, the individual, if your business doesn’t thrive!
- Family loan – obviously this means you borrow from others in your family. If you decide on this route though, you need to ensure you put some kind of formal repayment agreement in place (and in writing!). Doing this will help give both you and your family peace of mind and reduce any potential family tensions down the road.
- Lending institutions – these are usually banks. You can either apply for a business loan or you can remortgage your home to release funds for your business.
- Secured loans – this means taking out a loan on your business. If you own your offices or a factory or warehouse for instance, you can mortgage or remortgage these premises.
It is really important to speak to different lenders and brokers here so you have a good understanding of the different options. There are different tax implications on each of these options, too, so get in touch with us so you have the whole picture before you borrow.
A venture capitalist invests directly in your business and usually for a set term. These types of investors will have a strong expectation for a return on their money (think Dragons Den!), so you’ll need to put together a great (and honest) proposal to get this type of investor interested.
They’ll also expect a seat on your board and some level of controlling interest in your business, but for that you receive their commitment and expertise to take your business forward. If you pick the right investor, they will also bring you business via their other interests or contacts.
With these things to consider, it’s imperative that you do your research to ensure you approach investors that are serious, reliable and (if possible) have some knowledge of your marketplace.
If any of the options I’ve mentioned thus far have raised any questions for you, please get in touch. We can help you test your assumptions and work with you on the financial implications of financing your business.