Sources of Finance

At AHACCOUNTANTS, we summarize the various means of finance available for those starting or recently starting a business in the Nottingham area. Securing the right financing is fundamental to effective business management. When you get it right, you can enjoy a healthy business, positive cash flows, and ultimately, profitability. Finance may be needed at any stage of your business’s development—initially for startup costs and later for expansion.

Here are some common sources of finance, along with how we can assist you:

Bank Loans and Overdrafts

Most entrepreneurs think of their bank first when seeking finance. Banks are active in lending and prefer providing overdrafts or extending limits over formal loans, especially for small and startup businesses. Overdrafts offer flexible financing, allowing quicker repayment compared to fixed loans. If an investment opportunity arises while you have an overdraft, you might be able to extend your facility to cover the project.

Many businesses prefer fixed-term loans because they provide certainty in cash flow forecasting and budgeting. With a term loan, you have a clearer commitment from the bank for the loan duration. Unlike an overdraft, which can be withdrawn at any time, a loan remains secured as long as you keep up with payments.

While smaller loans may not require security, larger sums typically do. Business owners often offer personal assets, such as their homes, as collateral. It’s important to discuss this with co-owners to understand the implications fully.

Personal Savings and Friends

For many startups, initial funding often comes from personal savings. It’s also common to approach friends and family for financial support. Be transparent about the investment amounts they can afford to lose, and present your business plan for their review. Always document any agreements in writing to avoid misunderstandings.

Issuing Shares

Issuing additional shares can provide valuable funds and strengthen your business’s balance sheet. However, consider the implications of where the funding will come from. If the original owner wants to subscribe to these shares, they may need to borrow money, which could be challenging if they have already reached their borrowing limits. In some cases, a third party may need to buy shares, which could affect control or influence over the business.

Venture Capital

Approaching venture capital firms usually involves issuing new shares. The benefit of this route is the significant capital they can inject into your business, often accompanied by valuable business expertise. However, be prepared for increased pressure for growth and profitability, as these investors typically expect to see rapid returns.

For smaller enterprises, the government has introduced tax-efficient schemes for entrepreneurs, such as the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts (VCT). The SEIS aims to support small, early-stage companies by offering tax reliefs to individual investors who purchase new shares in those companies, recognizing the unique challenges these businesses face in attracting investment.

Retained Earnings and Drawings

To enhance liquidity, business owners may need to reassess how much they are withdrawing for personal use. Retaining more earnings within the business can provide additional funds for future growth.

Other Sources of Finance

Consider these alternative sources:

1. Factoring: This allows you to finance your business against unpaid invoices, enabling you to receive up to 85% of the invoice value immediately, with the remainder (less costs) paid when the customer settles.
2. Hire Purchase (HP): This option finances equipment purchases by spreading capital and interest payments over an agreed period.
3. Leasing: Ideal for financing equipment that you don’t need to own, leasing involves renting the equipment, often for vehicles, with payments spread over several years. Maintenance costs can sometimes be included in the agreement.
4. Matching Finance to Purpose: It’s essential to align the type of finance you seek with its intended use:

How We Can Help

At AHACCOUNTANTS, we can guide you through the various financing options available and assist you in making informed decisions tailored to your specific circumstances. If you are starting or have recently started a business in the Nottingham area, we welcome the opportunity to help you navigate the complexities of securing the right finance for your business needs.