The ICAEW has published a very useful PDF guide to the different types of finance available to limited company owners – from a traditional bank overdraft, to equity finance.
The best practice guidelines explain how small companies can work out the most cost-effective way to secure finance for their businesses, and the pros and cons of each source of funding.
Many start-up companies are funded with help from friends and family – there are many obvious benefits to seeking initial funding in this way. However, the ICAEW says that friends and family should be aware of the risks they face, and any business agreement should always be formalised in writing, including dispute resolution procedures in case something goes wrong.
Bank lending – the last choice for many company owners according to a recent study by Kingston Smith – includes overdrafts and longer-term loans. Overdrafts are more flexible and fast to arrange, but they can also be repayable on demand. Loans allow businesses to repay over a fixed period, and typically have lower interest rates than overdrafts.
However, newer companies may often face problems securing finance from larger institutions if they don’t have a proven track record, and company directors’ may also have to put up personal guarantees on behalf of their businesses – something with many are unwilling to do.
The guide also has a useful summary of Equity Finance – which enables companies to raise funds from investors in return for a stake in the business. Investors tend to expect a higher return than a traditional lender, as the risks are high, but business angels may be attracted by an unconventional business proposition, and may also be able to offer expertise to the business owners.
Angel investors (and syndicates) may be suitable for companies looking to raise from £10,000 to £2m, with venture capitalists (VC) more likely to be involved in larger fundraising initiatives.
The guide also outlines some of the Government’s recent initiatives, such as the Enterprise Finance Guarantee scheme, which is available to firms seeking between £1,000 and £1m in funding – and provided by 46 ‘accredited lenders’.
You can download the guide here (PDF format).