How to Raise £50k
A recent report by Ernst & Young‘s Item club forecasting group show that UK bank lending for 2012 is expected to fall by 2.2%. This comes as a huge blow to the thousands of small businesses that rely on banks for temporal and long-term finance.
Raising finance in today’s economy can be a daunting challenge but that doesn’t stop the need for funding in order to start and run a business. Imagine what £50k could do to your business? You could pay your bills, cover overheads, reduce existing debt or even undertake a management buy-out/in.
An overdraft is a pre-arranged limit by which a customer can borrow above their current account balance. This can often be a cost-effective way of borrowing money and the interest cost is normally variable and linked to the bank base rate. You only pay interest on the amount overdrawn, not the funding limit. Raising £50k in this manner is a norm but has the following pitfalls:
- Overdrafts could demand collateral – secured on current and personal assets
- Repayable on demand
- Not suitable for long-term finance
- If you exceed the funding limit (unauthorised overdraft), you will be charged very high fees.
- Doesn’t grow in line with your business – funding level could be insufficient as levels of turnover rise.
Bank loans (including commercial mortgages) are a guaranteed source of long-term finance and often provided for specific purposes such as acquiring an asset, long-term investments or share purchase. Loans are normally secured on valuable assets such as building and equipment and the interest rate could be either variable or fixed, depending on the bank. (More information is available in the business advice article Overdrafts & Bank Loans)
Factoring is a form of invoice finance that enables SMEs to raise finance against debt owed by customers. Using factoring, you could release up to 90% of the cash tied up in your sales ledger, with the cash typically made available to you within 24 hours of raising the invoices. In addition, the facility is made even simpler as the finance provider handles the administration of your sales ledger and debt collection.
The sales ledger is used as the prime security against which the funds are drawn, meaning your credit rating is not much of an issue. You could qualify for factoring if you have invoices outstanding and project an annual turnover of over £50,000.
Borrowing from Family and Friends
This is typically the most flexible means of raising business finance as long as they are willing to lend you £50k and trust in your ability to repay it. This might look like an informal way of borrowing but it’s important to document all the details of the arrangement including the amount, repayment date and interest, in case things go wrong. The main pitfall with borrowing from close ones is that you could easily fall out with them if you default on payment terms.
Enterprise Finance Guarantee Scheme
The Enterprise Finance Guarantee Scheme (EFGS), launched in 2008, is a scheme setup by the government to help SMEs that may be struggling to secure finance. This could because they do not have the collateral security that the bank would otherwise require. Under the scheme, you can borrow between £10k and £1million, with repayment terms of between 3-10 years.
The scheme is suitable for both start-ups and established businesses as the government could typically cover 75% of the loan. However, you need to present a solid and concise business plan and budget to demonstrate your ability to repay the loan. Talk to your bank as they will be able to talk you through the scheme and advise you on whether you qualify for the facility.
Venture capital is an attractive form of equity finance for smaller and start-up companies with limited trading history and limited access to credit facilities. A venture capitalist injects funds into your business, say £50k, in exchange for an equity share.
They acquire significant control over company matters, in addition to a significant portion of the company’s ownership and profits. However, they do not get involved in the day-to-day running of the business.
This business advice article is from www.invoicediscounting.uk.com