Business Library
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How to choose your best financing option |
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Different sources of money have different conditions attached. Some financiers require an involvement in the business; others take months even years to arrange funding. Some are costly but involve the recipient in little risk, while others are inexpensive, quick to arrange, yet impose comprehensive personal liability.
Choosing which financing option to use is a matter of personal preference, once the appropriate strategic balance between debt and equity has been struck. One of your tasks in managing the firm's financial affairs is to keep good lines of communication with as many of these sources as possible.
What are the options?
Costs: Raising new share capital is expensive. Between 10% and 15% of the first £500,000 you raise will go in set up costs. An overdraft or factoring agreement is cheap to set up, usually a couple of per cent. Loans, leasing and hire purchase agreements involve modest costs, while overdrafts cost less still.
Control: Selling shares inevitably involves some loss of control. Letting say 5% go may just be a mild irritation from time to time, while 25% could give others a fair amount of say in how things are run. While you have over 51% you are in control, if only just.
Speed: If time is important then an overdraft will be your best financing option. It can be arranged in days. Bank loans, leasing or factoring can take anything from a few weeks to a month or so to arrange. Raising venture capital will take between six months and a year.
Management time: Raising venture capital involves a considerable amount of management time. Plans have to be written and presentations made to several venture capital firms. Most other sources of finance are much less time consuming to arrange.
Flexibility: As your plans change, the amount of money you actually need may alter. With leasing, hire purchase agreements and long term loans and share capital the amount is agreed at the outset. For overdrafts it is possible to draw down only what's needed at any one time, with the upper limit negotiated usually each year.
Added value: With some sources of finance you can get useful expertise as well as money. For example, with factoring you could get expertise in managing credit that could result in fewer bad debts.
Security and certainty: For most sources of money, once you have agreed terms and comply with them, the funds are yours. Overdrafts are technically, and often actually, repayable on demand.
Personal liability: Providers of long-term loans and overdraft facilities will look to the directors to provide additional security if the business assets are inadequate. Raising share capital does not usually expose you to any personal liability if things go wrong.
Action Checklist:
- Review which of the above criteria matter most to you
- Decide, based on that review, which would be your best financing option
- Read up on each of those options before contacting them
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Get a Business Loan quote - click here
This is a guide. It may be helpful for you to speak to an advisor in commercial finance. E&OE