Finding the money to develop your business

External Finance

For most businesses, the principal source of funding has traditionally been in the form of overdrafts and fixed term loans, which account for about 50% of all external finance. The Bank of England has recently said that there is 'no real evidence of firms having difficulties accessing bank finance'.

However, the need for some form of security for bank finance can often lead even to the most well presented request for funding being declined. And with over 40% of business funding being provided by hire purchase, leasing, trade finance, invoice financing, partners and shareholders, less than 10% is provided by venture capital sources.

Debt Finance

Many lending institutions 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.

Where the 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 Small Firms Loan Guarantee, which provides a guarantee of 75% for loans, from a minimum of £5,000 to a maximum of £250,000.

Equity Alternatives

Equity finance 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.

Business Angels and Informal Investors

It is estimated that there are reckoned to be 20,000 to 40,000 angel investors in the UK, investing between £500 million and £1 billion per annum into between 3,000 and 6,000 businesses.

Enterprise Capital Funds

The Government has announced its intention to launch a series of 'pathfinder' funds, based on the US style 'Small Business Investment Company' (SBIC) model. There are to be known as 'Enterprise Capital Funds' (ECFs), and will involve the Government offering debt at a favourable rate of interest to privately owned and managed funds. An ECF would then be able to access private funds and offer these pooled funds to UK businesses.

How can we help

As lawyers we have extensive experience in working with clients and advising on available financing options, and lenders recognise the important role we play alongside businesses. If you see a need arising in your own business or know anyone else who would benefit from our expertise in raising finance.

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