Sources of finance

Personal funds

Finance, like charity, often begins at home and a would-be businessman should make a realistic assessment of his net worth, including the value of his house after deducting the mortgage(s) outstanding on it, savings, any car or van owned and any sums which the family are prepared to contribute but deducting any private borrowings which will come due for payment. The whole of these funds may not be available (for instance, money which has been loaned to a friend or relative who is known to be unable to repay at the present time).

It may not be desirable that all capital should be put at risk on a business venture so the following should be established:

  • how much cash you propose to invest in the business
  • whether the family home will be made available for any business borrowing
  • state total finance required
  • how finance is anticipated being raised
  • interest and security to be provided
  • expected return on investment.

Whilst it may be wise not to pledge too much of the family assets, it has to be remembered that the bank will be looking closely at the degree to which the proprietor has committed himself to the venture and will not be impressed by an application for a loan where the applicant is prepared to risk only a small fraction of his own resources.

Having decided how much of his own funds to contribute, the businessman can now see the level of shortfall and consider how best to fill it. Consideration should be given to partners where the shortfall is large and particularly when there is a need for heavy investment in fixed assets, such as premises and capital equipment. It may be worthwhile starting a limited company with others also subscribing capital and to allow the banks to take security against the book debts.

Banks

The first outside source of money to which most businessmen turn is the bank and here are a few guidelines on approaching a bank manager:

  • present your business plan to him; remember to use conservative estimates which tend to understate rather than overstate the forecast sales and profits
  • know the figures in detail and do not leave it to your accountant to explain them for you. The bank manager is interested in the businessman not his advisers and will be impressed if the businessman demonstrates a grasp of the financing of his business
  • understand the difference between short- and long-term borrowing
  • ask about the Government Loan Guarantee Scheme if there is a shortage of security for loans. The bank may be able to assist, or depending on certain conditions being met, the Government may guarantee a certain percentage of the bank loan.

Remember the bank will want their money back, so bank borrowings are usually required to be secured by charges on business assets. In start-up situations, personal guarantees from the proprietors are normally required. Ensure that if these are given they are regularly reviewed to see if they are still required.

Enterprise Investment Scheme - business angels

If an outside investor is sought in a business he will probably wish to invest within the terms of the Enterprise Investment Scheme which enables him to gain income tax relief at 20% on the amount of his investment. Additionally, any investment can be used to defer capital gains tax. The rules are complex and professional advice should always be sought.

Hire purchase/leasing

It is not always necessary to purchase assets outright that are required for the business and leasing and hire purchase can often form an integral part of a business's medium-term finance strategy.

Venture capital

In addition, there are a number of other financial institutions in the venture capital market that can help well-established businesses, usually limited companies, who wish to expand. They may also assist well-conceived start-ups. They will provide a flexible package of equity and loan capital but only for large amounts, usually sums in excess of £150,000 and often £250,000.

Usually the deal involves the financial institution having a minority interest in the voting share capital and a seat on the board of the company. Arrangements for the eventual purchase of the shares held by the finance company by the private shareholders are also normally incorporated in the scheme.

The Royal Jubilee and Princes Trust

These trusts through the Youth Business Initiative provide bursaries of not more than £1,000 per individual to selected applicants who are unemployed and age 25 or over. Grants may be used for tools and equipment, transport, fees, insurance, instruction and training but not for working capital, rent and rates, new materials or stock. They operate through a local representative whose name and address may be ascertained by contacting the Prince's Youth Business. Point of contact: telephone 0207-321 6500.

The Business Start-up Scheme

This is an allowance of £50 per week, in addition to any income made from your business, paid for twenty weeks. To qualify you must be at least 18 and under 65, work at least 36 hours per week in the business and have been unemployed for at least six months or fall into one of the other categories: disabled, ex-HMS or redundant.

The first step is to get the booklet on the subject from your local Jobcentre or TEC that includes details on how and where to apply. Once in receipt of the enterprise allowance, you will also have the benefit of advice and assistance from an experienced businessman from your TEC. All the initial counselling services and training courses are free.

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