All businesses require financing to ensure the day-to-day working capital requirements are met, to fund the acquisition of assets or to fund the acquisition of the business itself. The financing can be either short term or long term, depending on what is most appropriate. A business can require finance at any stage of its lifecycle and anticipating the need for finance provides the best opportunity to secure the most appropriate funding
The process of raising funds for business
Financing a business can be approached by following the below steps:
- Establish the amount of finance required
- Review the period over which the finance is required for
- Ascertain whether any assets can be used to secure the finance
- Approach suitable lenders based upon the above
- Review the affordability of any offers of finance
- Undertake any legal process required to secure the finance
- Compete on the financing
- Commence repayments
What are the challenges of raising funds?
Raising finance can be more challenging for young businesses with little or no credit history and businesses that are in urgent need of finance. It is important to take advice to establish what is likely to be a suitable source of finance before approaching lenders.
This method will reduce the risk of spending time pursuing sources of finance that may never be granted. In addition, creating a business plan and preparing comprehensive profit and cash flow forecasts will help you successfully approach providers of finance.
Sources of finance
Common sources of finance are:
- Bank loans (long term and short term)
- Overdraft facilities
- Vendor loans
- Shareholder/director loans
- Hire purchase
- Leasing arrangements
- Asset finance (such as stock loans)
- Invoice and debtor financing (invoice discounting and factoring)
- Equity fund raising
- Borrowing from connected entities (such as eligible pension funds)
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