During various points in the lifecycle of any business, it may need to raise finance for varying purposes:
- Expansion and working capital – this could be for growth into new territories, to fulfil substantial orders, increase stock holdings or buy new equipment.
- Debt refinancing – a business may find that its capital structure is not appropriate for the current financial conditions.
- Acquisitions – purchasing a business often requires external funding.
- Buy-outs – where some or all shareholders wish to realise their shareholdings, financing can be required to facilitate a transaction.
- Start up – for Research, Development and the launch of a business.
The first part of the equation is to establish the level of finance required. This would normally involve the preparation of financial projections which will identify the funding requirement and the basis of repayment which can be accommodated, (it is also important to assess the likelihood of achieving the projections). The next step is to establish what collateral the company can offer to financiers. Sources of finance fall into the following categories:
The advantage of equity financing is that it does not come with committed repayment terms.
- Friends & Family – the usual source of funds for start up ventures.
- Private investors/Business Angels – typically fund early stage ventures.
- Private Equity and Venture Capital – funds that invest in private companies, and can be used at a variety of different scenarios, including all of the purposes mentioned above.
The advantage of debt financing is that you do not have to relinquish any of the equity. Interest payments are also tax deductible.
- Long term loans – senior debt is usually repayable over a 4 – 15 year period.
- Overdrafts arrangements – short term, working capital financing.
- Factoring of invoices/Invoice discounting/revolving credit facilities – another flexible form of financing, which has increased in popularity.
- Finance leasing/hire purchase – arrangements designed to fund asset acquisitions.
- Mezzanine – ‘Mezz’ finance is a hybrid of debt and equity. It generally ranks behind debt in terms of security, but carries a higher interest rate, and can be converted into equity based on certain conditions.
- Grants – there are various sources of grants from the public sector. Click here, for the Business Link guidance on grants.
It is important that the source of finance is consistent with the nature of your business and its objectives. We can help your business raise the most appropriate type of finance, utilising our experience and close relationships with a number of finance providers.