An existing business may need additional funding to pay for its day-to-day running, to grow its sales, expand into new markets, or to develop new products or services. Here’s key information about funding an existing business.
Video: Should I try to arrange a larger overdraft?
That depends on what your aim is. Remember that an overdraft is a short-term option for managing your cash flow. So, if your business is growing, you may benefit from an larger overdraft facility that reflects your increased turnover. However, you shouldn’t aim use an overdraft as a permanent source of finance or to grow your business, e.g for when buying new equipment. Your bank may take a dim view on using an overdraft to finance specific investments and may ask you for personal guarantees.
If you’re planning to make investments you should consider other options such as taking out a loan, a lease arrangement, or attracting others to invest in your business.
The following video looks at loans v overdrafts in a bit more detail, explaining when loans are likely to be most suitable and where overdrafts are best used.
How can I get more working capital?
Sometimes you need a sum of money to tide you over which would exceed your overdraft limit, for example while you are waiting for a large invoice to be paid, or when you need to order stock to fulfil a big order.
One option is to ask your bank for a bridging loan. Other options include going to companies which specialise in providing fast short-term loans – for example of between three to 12 months – such as Iwoca. As you might expect, the interest rates can be higher than longer-term loans, but an advantage is that they can be put in place extremely quickly.
If your business involves receiving lots of credit card payments, such as retail, hospitality or leisure, you might consider merchant cash advances. This is where you take out a loan and the lender then takes a proportion of income received through your credit card terminal until the loan is paid back. Many lenders only work with specific terminal providers, so your choice can be limited.
Another option is invoice financing – see below for more on this.
Invoice financing can be a useful way of assisting cash flow by releasing cash tied up in outstanding sales invoices. It can be particularly beneficial for businesses that have a turnover of more than £100,000 and which issue a large number of invoices, or large value invoices. It’s usually only available for businesses that trade with other businesses, not the public.
Invoice financing involves a third-party – such as a bank or other financial firm – buying your unpaid invoices in return for a fee.
One type of this is factoring. This involves the third-party buying the invoice and then collecting the money owed by your customers. This is how the process works:
It starts with you issuing the invoice to the customer
The third party pays you a large proportion (80%-90%) of the invoice value
The third party then collects the invoice payment from the customer, and pays you the balance
You then pay the third party interest and fees.
Another type of invoice financing is known as invoice discounting. This involves the bank or financer lending you a percentage of the total value of your invoices knowing that you should get the payments in the near future. In return you pay a fee. You are still responsible for collecting the debts.
The advantages of invoice financing include helping you to maintain a steady cash flow, providing more financial security and in the case of factoring, freeing up time you might otherwise need to spend chasing payment. The disadvantages of invoice financing include the costs, and in the case of factoring, another business entering the relationships between you and your customers. Watch out for companies who want to lock you into long contracts or charge you hidden fees. You could try a company that allows you to just put through just one invoice at a time.
The video below runs the basics of invoice financing, describing how the process benefits businesses and improves cash flow.
How can I get a loan from a bank or other commercial lender?
Knowing what factors banks and commercial lenders use to decide whether to make a loan to a business will help you to prepare your application. Scroll through the carousel below to find out what a bank is usually looking for.
Where else could I get a business loan?
One of the ‘alternative lending’ schemes that have arrived on the scene over the last few years is peer-to-peer lending (P2P), which is a type of crowdfunding.
Peer-to-peer lenders are individuals who lend out their money in return for earning interest. The lending is carried out through intermediaries who operate online platforms. Peer-to-peer lending to businesses – as opposed to lending to private individuals – is sometimes known as peer-to-business (P2B).
P2B lending is a fast growing sector. Some can lend between £5,000 – £1 million, with up to £250,000 being unsecured, depending on your circumstances. To qualify there may be requirements such as having been trading for at least 2-3 years and having a specific minimum turnover.
The advantages of P2B lending include quick decisions and fast availability of funds for approved applications. Interest rates are fixed for the duration of the loan. Loan terms can be flexible – from a few months to five years – and there are often no early repayment penalties.
The disadvantages include that interest rates can be quite high for some sites, as can set-up fees. Because your application may not be subject to quite the same degree of scrutiny by the lender as a bank might, you need to ensure that you’ll be able to repay the loan to avoid landing yourself with unmanageable debt. As repayment periods can be quite short, monthly repayments can be quite high.
Applying for P2B loans is normally a straightforward online process. Funding Circle for example, enables you to compare the monthly and total repayments for different loan amounts over various repayment periods.
How could I get investment in my business?
There are various ways of raising funds by selling part of your ownership in your business.
Sources of investments
Here are some of the options available to you.
Equity finance is a type of funding where you give someone equity (shares) in your business in return for their investment. The investor/s become shareholders in your business. If it does well they share its profits, but of course they stand to lose if things go wrong.
If your business isn’t already a company you’ll have to register as such in order to be able to issue shares. Having equity investment is a good option if you don’t want to risk taking out a large loan and then not being able to meet the repayment terms. But it’s not such a good option if you don’t want to give up equity in your business.
One way of seeking investment is through equity crowdfunding. The method is similar to peer-to-peer loans but the result is that people who agree to provide money, get a stake in your business, rather than earnings from interest on a loan. You’ll need to find platforms that provide equity investment and that also deal with established businesses as opposed to purely start-ups.
Another way of getting equity investment is through business angels. These are high net worth individuals investors who invest in early-stage businesses. But if you’re looking to significantly grow your business – e.g. through a new product or service – it may be worth investigating this type of funding.
An angel investor will typically put between £10,000 and £500,000 into a business. Some form groups or syndicates to make their investments. Most will look for the business to generate up to five times their initial investment over a three to five year period.
Business angels tend to be entrepreneurs, and many seek to play a fairly active role in supporting the business they invest in. For example, some angels become the chair of the management board. You may face pressure from angel investors to sell off your business when they think the time is right.
If you’re looking for a significant investment to grow your business – say £500,000 or more – venture capital (VC) may be the answer. Venture capitalists invest in businesses through funds that are raised with private or public money.
One of the advantages of venture capitalists is that they can generally lend larger amounts than individual business angels. VCs also tend to be less involved with the running of businesses they invest in than business angels.
A disadvantage of VCs is that because they’re investing other people’s money they have strict criteria about who they can lend to. They tend to take less risks than business angels, and also want to get a quick return on their investment, e.g. within about three years. Typically this would involve them looking for an ‘exit’ by selling the business or ‘floating’ it so that more shares can be sold.
Make sure that you budget for the costs involved in finding investors and concluding legal agreements with them. To raise a couple of hundred thousand pounds of equity investment may cost at least £20,000.
If within a couple of years, you need more money your investors may be worried about pouring good money after bad. However, if in the medium-term you need additional funding to move into new markets, increase production, or take advantage of a new opportunity, they may be willing to increase their investment.
Mezzanine funding is a cross between a loan and an equity investment.
There are different types of mezzanine funding, but essentially the funder provides the business with a loan and if this isn’t paid back in full and on time, the lender is entitled to take a share in the business – in other words they get equity.
An advantage of mezzanine funding is that there is no need to provide company or personal assets as security against the loan. There’s not a huge amount of ‘due diligence’ so arranging mezzanine finance tends not to take as long or cost as much as other options.
The disadvantages of mezzanine funding include interest rates being high and of course the risk of giving up a stake in your business if things go wrong and you can’t repay the loan.