Growing a business: Types of finance
There are various types of finance available, and so you need to choose the type (or combination) that is right for your business. Options include:
- Grants, which do not need to be repaid but which are difficult and time consuming to obtain
- Invoice discounting or debt factoring where you obtain finance on the security of your debtors
- Asset finance and commercial mortgages where you obtain finance on the security of your assets
- Loans and overdrafts, where the lender usually takes a charge over the assets of the business, and may also ask for personal guarantees
- Selling shares or bringing in a new partner, where you obtain long term finance but may lose some control and share of the profits of the business
- Business angels, private investors who will invest relatively small amounts (usually up to, say £100,000) without security but usually become involved in running the business
- Venture capitalists, companies which acquire shares in your business, generally with a view to selling them at a profit in three to ten years, possibly following a listing. They do not become involved in the day-to-day management but might seek representation on the Board.
In order to decide which type of finance is right for you, you need to consider factors such as:
- The cost of the borrowing
- The security you can offer
- The length of time for which you need the funds
- The extent to which you are prepared to dilute your control of and stake in the business.
In a funding situation, it is not all about what you want, but what the funder is prepared to give you. All have their own criteria, including: size, location, industry, stage of business development, time frame, and required return. The art lies in matching the proposition to the source and, usually, devising the right combination of different sources. Funders usually require you to set out your proposal in a business plan.
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