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When you are faced with raising finance for your business, be open-minded and think laterally about the sources of finance you consider. You could get funding from a combination of sources – selling shares, debt, grants and subsidies. Generally speaking, the overall structure should be designed such that the business can service any debt repayments and interest without difficulty, while you are satisfied that you have given up the minimum possible amount of equity.

What is the best financing structure for your business?

There is no easy answer to this. It will depend entirely on the nature of your business and – at least to start with – on the type of finance you actually manage to secure – particularly in the current environment of very low bank lending. Most start-ups are funded by personal savings or loans, funding from family or friends and small grants. This is usually known as the seed capital. You may obtain a business loan if there is sufficient security or you may be entitled to an Enterprise Finance Guarantee loan. If the proposition is really exciting, with excellent growth prospects, you may be able to get equity, e.g. Business Angel funding.

Typically in the early stages you would probably be best advised to avoid giving up any equity, and work any available cash and loan resources as hard as possible. Follow the general rule that longer term borrowing should only be used for assets, such as equipment, that will give you benefit over the longer term. Examples would include a mortgage or a car lease. Use shorter term finance such as overdrafts and invoice factoring to help to balance the operating cash flow, i.e. what is called the working capital requirement that arises from trading, due to the timing differences between supplying or buying goods and services and when they are actually paid for.

As the business grows, and either becomes profitable and cash generating or it is reasonably evident that it will become so, financiers will develop more of an appetite to fund the enterprise. This is because as the business proves itself, so the overall risk is reducing. The chance of failure or insolvency diminishes – to an extent. There will always be some element of risk, in any enterprise, because of potential changes in demand, competition, technology, management etc.

The choice of finance structure will depend in part on how much ownership, or equity, you are prepared to give up in order to expand the company. This assumes that the business is incorporated as a limited company; as a sole trader or partnership you would not be able to sell equity, but loans, grants and other sources are available.

Investment in your company is essential for growth, and without growth the enterprise will not survive in the long term. The investment finance can be generated internally – usually reinvestment of profits – or sourced externally. If the business is starting up or growing, internally generated cash may well be insufficient to fund any investment.

There are countless sources and forms of external finance. Overdrafts, loans, equity, grants, leasing, mezzanine, HP, banks, business angels, venture capital, flotation, European funds…the list is endless. The point is that the money is out there, and you just have to work hard at putting a convincing case for your company to get it – at the best possible rate and terms. Our role at CMC partners is to make the process easier and more successful.

For an initial discussion on how raising finance could help your business complete the form below: