Types of Business Finance, Business Economics & Finance | Business Economics & Finance - B Com PDF Download

There are a number of different types of funding which are available to a business during the growth phase.

For most businesses, the principal source of funding has traditionally been in the form of bank overdrafts and fixed term loans. Other sources of funding include hire purchase, leasing, trade finance, invoice financing, partners and shareholders and venture capital.

Debt finance

Many lending institutions providing debt finance such as the banks have developed ‘credit scoring’ techniques that assist them with small business funding applications. The determining criteria include credit history, past bank account management, the applicant’s track record in business and willingness to invest their own money in the business, and evidence of repayment capability based on a business plan.

If an individual does not have a previous track record and has little or no capital, the application will focus on the entrepreneur’s ability and willingness to provide some form of security against the borrowing. One possible source of guarantee for finance is the Enterprise Finance Guarantee under which the Government will guarantee lending to viable businesses to ensure they can secure the working capital and investment they require.

Equity Finance

Equity finance provides the funder with an ownership or equity interest in the business and accounts for about 8% of external finance for small and medium-sized businesses. Those companies that do attract this type of funding tend to be highly innovative and have a prospect of good growth. According to 97% of respondents to the Government’s ‘Bridging the Finance Gap’ consultation, there remains a significant lack of equity finance available, but this is a source of funding that looks set to increase in the future.

Mezzanine Finance

Mezzanine finance is a hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies.

Business angels and private investors

Business angels and private investors normally would provide funding at an early stage in the development of the business. The funding is normally in the form of equity. There are a number of business angel networks such as Xenos that specialise in helping companies access this type of funding. Crowd funding has also recently emerged as a form of business angel and private investment.

Venture Capital Funds

Venture capital funding is provided by wealthy individuals, investment banks and other financial institutions such as Finance Wales. This type of funding is usually in the form of equity. VC’s will be requiring significant returns from their investment and an exit route normally within a period of 5 years.

How we can help

As accountants and professional advisers we have experience in working with clients and advising on available financing options, and lenders recognise the important role we play alongside businesses.

The key steps to successfully raising finance are

1. Choose the right financier – Learn about the various sources of finance and select those best suited to your purpose. If in doubt, seek our help.
2. Provide the financier with the right information – Make sure that you fully understand the information that the bank (or other financier) requires. This often means much more than basic financial projections. A financier usually needs to gain an appreciation of the business, the quality and depth of management and the key people involved.
3. Take professional advice – It is best to use the services of a professional when preparing and presenting your proposal. We can help you prepare a solid, detailed business plan that will attract financial support, and perhaps identify potential financiers who will meet your needs.

A well-prepared proposal presented to a carefully chosen lending source will have a greater chance of success. It is worth investing enough time, preparation and effort to get it right.