No-Nonsense Guide to small business funding

8/14/2019 No-Nonsense Guide to small business funding

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No-Nonsense Guide

to Small Business Funding

Where to find expert advice Getting the right finance

Business planning Keep the cash flowing in

Expanding your business Choosing a loan

Are you eligible for a grant? Buying, leasing and hiring


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3/442 www.businesslink.gov.uk

2 FUNDING OPTIONS

Self-financing your business ....................16

Should I use my own savings?

G The pros and cons of self-financingGShould you remortgage or use credit cards?

Getting finance from the bank ..................19

How do I get my bank manager to say yes?

GWorking out if you need a loan or an overdraftGGetting the best deal from a bankGWhere to go if the bank says no

Investment from friends, family

and the community ....................................24

How do I safely borrow from the community orfriends and family?

GWhat do you need the money for?

G The pros and cons, and avoiding pitfalls

Premises buy or rent? ............................27

How can I buy my own business premises?

GShopping around for the best dealG The advantages of commercial mortgages

To buy, lease or hire equipment ..............28

Should I buy, lease or hire new equipment?

G The advantages of buying or leasingGHow leasing works

Is my business eligible for a grant? ........30

What chance do I stand of getting a grant?

GWho hands out the money, and how to applyG Your chances of success

Attracting investors ..................................32

Am I likely to get equity funding?

GWhere to get equity financeGHow to find an investorGAlternative funding, such as patient finance

1 PREPARATION

The right finance for you ............................4

How do I get the money together to startmy business, or to take my business onto the next stage?

G Working out how much you need and whenG A guide to choosing the right funding option

for your business

Getting the right financial advice ............10

Who can I turn to for practical, jargon-freeadvice, and how much will it cost me?

G Getting advice from your local Business LinkG Approaching the bank managerG Approaching an accountantG Using an Independent Financial AdviserG Getting advice from a solicitor

Planning for your business ......................12

Where do I start and who can help meproduce a business plan?

G What your plan should includeG Forecasting your financial needsG Potential pitfallsG Who can help?G How the legal structure of your business can

affect your plan

Contents

NO-NONSENSE GUIDE TO

SMALL BUSINESS FUNDING


4/44www.businesslink.gov.uk 3

Improving the flow of money ....................34

How do I solve my cashflow problems?

GGetting customers to pay sooner

GAdvancing money against your debts

GNegotiating terms with your supplier

G Just-in-time ordering

GAvoiding late payers

Solving funding problems..........................38

Im continually facing financial difficulties what can I do?

G Tackling stock problems

GSorting out late payers

GHandling seasonal fluctuations

3 MAXIMISING BUSINESS FINANCE 4 TAKING THE NEXT STEP

Newbusinesses

Funding a newbusiness

Using your own money 16-18

A loan or overdraft from the bank 19-23

Small Firms Loan Guarantee scheme 20

Investment from friends, family and community 24-26

Grants and government schemes 30-31

Equity investment from business angels, family and friends,the community or alternative sources such as patient finance

32

Avoiding late payers; debt factoring 34-37

Supplier lines of credit 34-37Tradingbusinesses

Acquiringassets

Bank loan or overdraft to fund purchases 19-23

Hire purchase 28-29

Leasing 28-29

Commercial mortgages 27

Maximisingyour currentfinances

Overdrafts 19-23

Avoiding late payers; debt factoring 34-37

Supplier lines of credit 34-37

Your business

the next stage

A loan or overdraft from the bank 19-23

Investment from friends, family and community 24-26Grants and government schemes 30-31

Equity investment from business angels, family and friends,the community or alternative sources such as patient finance

32

FIND THE RIGHT SECTION

The next step ..........................................40

How can I get a cash injection to takemy business on to the next stage?

GOptions for expansion

GThe practicalities of growth

GSources of funding

Making the most of Business Link ........41

Who produces this guide?

GWho Business Link are

GTheir involvement with this guide

GHow to contact them for further advice


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Further adviceFor tips on drawing up a business plan pages 12-13

www.businesslink.gov.uk 5

options for raising large sums of money, otherfinance methods may be more suitable. Formore on attracting outside investors to yourbusiness (such as business angels and venturecapitalists) read the No-Nonsense Guide toFinance for High Growth Companies.

How much do you need and when?

Borrow too much and you could end up payinginterest on money youre not using too littleand you could end up relying on an expensiveoverdraft facility to top up your funding, or evenhaving to shelve the project mid-way through.

Its vital to accurately predict how muchmoney youre going to need and for that youneed a business plan. Prepare a cashflowforecast for the first year. This will estimate

how much cash should flow in and out of yourbusiness each week and month. Assume aworst-case scenario costs are usually higherand sales lower than you think.

Do you need short or long-term funding?

Short-term funds, such as an overdraft, aresuitable for day-to-day needs (working capital).For example, an overdraft could see youthrough the first few months of business, while

you wait for money to come in from customers.For longer-term projects, such as buying

property or machinery that will be vital to yourbusiness, long-term funding, such as a loan,will be a more cost-effective solution.

Preparing to get the money

Whoever you approach for funding, you have tobe prepared to answer the following questions:IWhy do you want the money?IWhat will you use the money for?I How much are you personally putting intothe business?I How much do you need to borrow?I How and when do you plan to repay it?I Do you have any security?I Have you considered other options and whydo you think this one is the best way forward?

Starting your own business inevitablyinvolves an element of risk, andincreasing your debt through loans and

overdrafts all adds to that. To get the right

funding for your business you need to think

about your attitude to those risks.

For example, are you willing to stake your

home on your business by remortgaging

your house to raise funds? Or do you wantto limit liability by choosing a safer but

higher cost option, or even starting smaller

and choosing to grow gradually?

Harry Cragoe, founder of PJ Smoothies,

found that he needed to sell up everything

to give him the incentive to move his

business forward, while EasyJet founder

Stelios Haji-Ioannou recommends you only

put in what you can afford to lose. What

about friends and family? Would you feel

uncomfortable taking money from them

and perhaps putting them at financial risk?Would you rather borrow from a bank or get

a cash injection from an investor in return

for a share in your business?

ASSESSING YOUR OWN ATTITUDES TOWARDS RISK



I need funding to get my business started. What choices arethere, and how can I find the most appropriate one for me?

1 PREPARATION

Self-funding Most small businesses starton a modest scale; owners use their savings,investments and assets to help raise funding.Pros

G You get all the profits and retain controlG You dont have any interest repayments orloan charges (unless remortgaging your home)G It demonstrates your commitment, whichcan influence financiers at a later dateCons

G Youre using up cash reserves that could beuseful if your business hits a rough patchG Assets used to raise money, like your home,are at risk if you dont keep up repayments

For more on self-funding, go to pages 16-18.

Friends, family and the community This is acost-effective way to get finance. To fund ashort-term cashflow problem, consider a loan.For a longer-term solution, consider givingthem a share in your business in return forinvestment. You need to be honest withinvestors about the risks, and should draw up aformal agreement.Pros

G Family, friends and community members aremore likely to be supportive of your ideaG The terms and conditions are usually moregenerous than those of a bankCons

G It can sometimes test relationshipsFor more on accepting funding from family,

friends or the community, go to pages 24-26.

Government support Your bank may ask forsecurity against a loan, such as your house. Ifyou cant provide this, you may be eligible forthe Small Firms Loan Guarantee (SFLG).

For more on SFLG eligibility, go to page 20.

Grants Discretionary grants are availablefor some organisations, usually in specificindustry sectors or geographical areas.Pros

G The money does not have to be paid backG You dont give up a share of your businessCons

G The application process can be longG A grant typically only covers between 15-50per cent of your costs

For more on how to apply for grants, goto pages 30-31.

Bank loan You pay back a certain amounteach month, plus interest, for a set period.Pros

G A clear repayment schedule means youcan forward-plan your cashflowG You dont give up control of your businessCons

G You may need a business track recordG Your bank will probably ask you to comeup with a share of the capital

For more on bank loans go to pages 19-23.

Investments If youre prepared to give up ashare of your business, consider investmentfrom business angels. Social enterprisesshould also investigate patient capital funds.Pros

G You dont have to make loan repaymentsG You gain the contacts and skills of the investorCons

G You will have to relinquish some control over

your company (and profits)G They may look for a management track record,so might not be suitable for new businesses

For more on attracting investment, go topages 32-33.

FUNDING A NEW BUSINESSBanks are still one of the most common sources of funding fornew enterprises in the UK, but there are other options andmany entrepreneurs choose a combination of finance types


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Loan If you want to own the item there areseveral options, including taking out a loanfrom a finance provider or friends and family.ProsG Buying the item outright could be cheaperG The item can be classed as a business asset,

so could be used as security for the loanG You may be able to claim tax relief on interestand capital allowances on the asset purchasedConsG You need to compare the cost of borrowing(including interest repayments and fees)against the cost of alternatives to make sureyou get the best possible dealG If you dont keep up with your loanrepayments your goods could be repossessed

For more on bank loans, go to pages 19-23.

Hire purchase (HP) HP allows you to buygoods on credit and you pay off the cost overa defined period. Although legal title passesto you at the end of the term, for tax purposesyoure classed as the owner from the outset.ProsG You can choose fixed repayment, so costs willnot rise with interest ratesG You may be eligible forcapital allowances, whichallow you to offset the costsof some assets against theprofits of your businessG You can claim the VATback on paymentsConsG You may have to pay

a deposit upfrontG HP is not suited to itemswhere maintenance costsare high, or that go out ofdate quickly

Leasing Unlike hire purchase, with leasingyou never actually own the item. Instead, youpay a finance company for the use of it, inregular installments over a fixed period.ProsG As the repayments are scheduled, you can

match them to your companys cashflowG As part of the deal, the leasing companymay include maintenance and insurance costsG You can claim back VAT and deduct leasecosts from taxable incomeConsG Items cant be classed as a business assetif you need to arrange further borrowingG You may end up paying more in the long term

For more on leasing options, go to page 28.

Hire If your business needs equipment, officefurniture, vehicles, manufacturing machineryand so on, first ask yourself how frequentlyyou need to use them. If you only need theequipment occasionally, investigate hiring themin on a daily, weekly or monthly rental basis.ProsG You dont have to pay for maintenance

or insuranceG Payments are taxdeductibleG You only pay for theequipment when youneed itConsG The goods cannot beclassed as an asset ofyour businessG

If you hire the itemregularly it could be moreexpensive than buying it

For more advantagesof hire go to pages 28-29.


Further advice

For information on cashflow problems page 34-37

ACQUIRING ASSETSAt some point your business will need assets machinery, computers, even premises.Is it best to buy outright or should you lease, hire or rent?



My business needs some extra money to cover day-to-day costs.Are there any ways to raise this without using external finance?

1 PREPARATION

Getting money rolling in promptly is vital forany enterprise; it can make all the

difference between a company that just gets by,and one that thrives. If youre having problemsgetting paid by your customers on time, find

that youre constantly overdrawn or perhapsare just going through a period of irregularcashflow, for example a seasonal lean period,there are a number of techniques you can useto help resolve these issues. Here are somepossible strategies to help your business:

Get paid on time Send your invoices outpromptly, ideally at the point of delivery, anddont be afraid to chase debts as soon astheyre due. You can also encourage yourcustomers to pay you promptly by offeringthem a discount incentive. For more detailssee page 36.

Order less stock more often If youreholding too much stock, you could be tyingup cash that would be better used to coverday-to-day expenses. Look at orderingtactically. This could mean ordering items in

smaller amounts but more often, which couldencourage a steadier flow of cash throughyour business.

For details on efficient stock control visitwww.businesslink.gov.uk/stock

Advancing money against your invoicesYou could look at raising finance againstthe security of the money owed to you byyour customers. Invoice finance is likeborrowing and involves a factoring businessor invoice discounting company advancingyou money against your invoices as soonas you issue them.

Pros

G A factor may advance you moremoney than you would typically beable to get from a bankG It speeds up cashflow by removingthe time-lag between when youissue an invoice to a customer andwhen you get paid for itG Factoring can be an effectiveway of outsourcing your salesledger activityCons

G It doesnt work for allbusinesses you really need tosell goods or services to other

businesses on creditG There may be more cost-effectivemethods of financing (see opposite)

For more on cashflow problems,go to pages 34-37.

TACKLING CASHFLOW PROBLEMSReleasing funds that already exist in your organisation is a far more cost-effective way oftackling cashflow problems than seeking a loan. You may also be able to make yourexisting income go further to cover those regular expenses, such as salaries and bills


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Bank loan This can be a cost-effective option.Pros

G If you have been trading for a few years, thebank may be more willing to give you a loanG You have a clear repayment schedule, so you

can forward-plan your cashflowCons

G You may be asked for some kind of security particularly if the loan is over 25,000G Your loan could be secured against businessassets if you fail to meet payments the lendercan close your business downG The bank may ask you to come up witha share of the capital to fund the growthG The bank may require you to have a fall-backoption, such as some kind of insurance

For more on negotiating the best deal withyour bank manager go to pages 19-23.

Friends, family or community loanA cost-effective route to finance may be to askfriends and family, or community members fora loan or to invest in your business.Pros

G Repayments should be flexible and are oftencheaper than those of a bankCons

G They may expect some kind of involvement,or share in the business, in return for fundingG There is a possible danger of family conflictif the loan details are not clearly understood

For more on negotiating terms with friendsand family and on community investment go topages 24-26.

Grants You could be eligible for a grant to helpdevelop new products or enter new markets.Pros

G There are grants for specific projects such

as developing in a specific region of the UKG The money does not have to be paid backCons

G The application process can be demandingand distract you from running the businessG A grant is unlikely to cover all your costs typically you get 15-50 per cent of the total

For more on grant eligibility, go to page 30.

Investment options External investment froma business angel (an entrepreneur who typicallyinvests between 10,000 and 750,000 in smallbusinesses) can be a reliable source of funding.Pros

G You dont have to make loan repaymentsG As well as funds, business angels offer skills,contacts and experienceCons

G Not all businesses are attractive to investors angels look for a good management trackrecord and strong growth potential

For more information on attracting investors,go to page 32.

Joint ventures Pooling the resources andexpertise of two or more businesses can bea cost-effective way to grow both companies.Pros

G Working with another company could helpyour business develop new products, increaseyour capacity and move into new marketsCons

G You may have to relinquish some control overthe management of the businessG

You need to ensure you arent adding extracosts to your business or losing market shareFor more on getting the best fromjoint

ventures and partnerships visitwww.businesslink.gov.uk/partnerships


Further advice

For tips on planning your next business move page 40

YOUR BUSINESS THE NEXT STAGETaking your organisation on to the next stage, moving to biggerpremises, buying a competitor or investing in new machinery tohandle bigger orders, often involves a further round of funding


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Getting the rightfinancial advice

What kind of guidance should I seek when raising funds, how can Ifind the right expert, and how much will their services cost?

Small businesses may be reluctant to spend money on expert advisers,

but they can be a wise investment, providing essential financial support

10 www.businesslink.gov.uk

The right adviser can be vital to thesuccess of a business whether youreraising funds to get a new venture off the

ground or youre growing an existing business.The first port of call should be Business Link,

where a local adviser can help you get anobjective assessment of your business needsand how to prepare a suitable business plan.They can also help you find specialists who canadvise you on the types of finance to consider.

Its also worth approaching your bank; mosthave specialist teams to look after smallbusinesses. They can recommend externaladvisers, as well as giving you financial advice.

Getting advice from an accountant

You may decide to do some of the bookkeepingyourself, but remember, using an accountantcould help you save money. They will ensurethat you claim for all your legitimate expensesand the tax allowances you are entitled to,

which will probably save you money when yourtax bill is being calculated.On a broader level, an accountant should

be able to advise on raising finance, managinggrowth, budgeting and cashflow issues. They

may be able to help you with your businessplan and suggest tax-efficient ways of seekingbacking or investment. Read our guide tochoosing an accountant for your businessat www.businesslink.gov.uk/accountants

Choosing the right adviser for your business

I Talk to those whose opinions you trust. Speakto local businesses and find out where they goI Set a budget and shop around for the best dealI Understand the charging terms find out ifthey charge by the hour, or whether theyllagree to an all-in annual fee. Ask them for anestimate of their costsI Get everything agreed in writingI Interview any potential adviser, make it clearwhat you expect from them, and find out if theyhave experience in your market or industry andhow they can help you develop your businessI Get client references in writing, or find outnames of people you can speak to

Jenny Fiztpatrick owns The Fine Food Store inStamford, Lincolnshire, and saw the benefit ofusing a local adviser. I chose a reputable firmused to dealing with small companies thatknew the local market, she says.

1 PREPARATION

IN A NUTSHELL

G Budget for expert advice and view itas an investment rather than a cost

G Approach Business Link for advice onraising finance and specialist advisers

G Develop your own bookkeeping skills

G Shop around meet and interview anypotential adviser in person

G Get everything (including fees) in writing


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Further adviceTo find if your business may be eligible for a grant pages 30-31


Learning the skills yourself

Before employing an accountant, look into howmuch of the work you can do yourself. This canbe cost-effective, but will take you away fromother areas of your business. You may be ableto manage your accounts without a bookkeeper,or save on accountants fees by giving themmore detailed information.

For James Marsh, founder of RookbeareFarm, an ice cream manufacturer in Devon,the key is organisation. We do our ownpayroll using the tax and National Insuranceinformation from HM Revenue & Customs,he says. The tables are straightforward itsjust a question of being organised.

Its important to know what money is comingin and going out of your business, so monitor

expenses and profits. This will ensure thereare no nasty surprises at the end of the yearwhen you get your tax bill. Read our advice onsetting up your own record keeping system atwww.businesslink.gov.uk/recordkeeping

Having a basic knowledge of accountingwill also help when preparing a businessplan and presenting it to potential investors.They will want to see evidence that youhave a sound grasp of your businesssfinancial situation. I

Michelle De Bruyne used anaccountant to set up her company,AmHealthy, which offers ShapeUp

and Health programmes. However, shedecided to save money on subsequent feesby doing her own bookkeeping.

Michelle is very organised. As receipts

come in I put them into labelled folders,she explains. If something is paid for bycash, the receipt goes into the cash sleeve,if by bank account into the bank accountsleeve, etc. All the paperwork is kept in anordered filing system.

When it comes to inputting the figures,Michelle uses the accounting packageprovided by her bank when she opened abusiness account. It allows for categories

such as marketing,administration,telecoms andstationery, she says,so I can enter therelevant figures fromthe filed receipts.

Michelle uses bankstatements as aprompt to enter data onto the accountingsystem and to reconcile things.

Good organisation has been the key tothe success of Michelles DIY system.Track everything, even small amounts ofspending, she advises. Develop a systemyou can work with and keep a routine fordoing your records and dont let it slip.

CASE STUDY Going down the DIY route

G For details of local training courses onfinancial management:Business Link

www.businesslink.gov.uk/training

G For a directory of accountants:The Institute of Chartered Accountants

www.icaewfirms.co.uk

G For advice on social enterprise visit:Social Enterprise Coalition

www.socialenterprise.org.uk

WHERE TO GO NEXT


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Planning foryour business

Regardless of whether youre raising

finance from a bank, friends, family

or even investing your own money, youll need a sound business plan

I know I need a business plan but I dont know where to start.What should it include and who can help me put it together?


Every business should have a realisticbusiness plan whether youre startingup and looking for funding or if youve

been up and running for years.A good plan can have many benefits. It will

give your business a sense of direction, tellingyou where youre going and how youre goingto get there. Its also vital when youre lookingfor funding without one you cant convince apotential lender that your business proposal isachievable. And it gives you something tomeasure your progress against, keeping yourcompany on track.

Recent research also reveals that having abusiness plan can help increase your profits.Companies that undertake regular businessplanning have an average profit margin of54 per cent, while those that dont average35 per cent (source: Lloyds TSB).

What should your plan include?

A business plan doesnt have to cover everysingle aspect of your business, but it does haveto answer the following questions:

I What are the objectives for my business?I How will I achieve these objectives?I What are the risks involved?I What is the timescale?I How much will it cost?

Social enterprises also have to ensure theirbusiness plan clearly shows how their socialmission is embedded into their structure,governance and how they use their profits.One phrase you may hear, particularly inrelation to social enterprises, is the doubleor triple bottom line. This describes abusinesss ambition to meet financial, socialand environmental goals.

A lender will expect to see information on:I Management: The key people, theirexperience and knowledge of the industryI Product or service: Details of the productor service youre going to offerI

Markets: A description of the market size,customers, competitors and sales estimatesThe legal status of your business will also

affect your business plan (see the table onpages 14-15 for details).

1 PREPARATION

IN A NUTSHELL

G A business plan should address points

including: Why does your organisation

exist? Where do you want it to go?

How do you plan to get there?

How much will it cost?

G Investigate the legal structure of your

organisation to understand what impact

that will have on your plan

G Get help from your local Business Link

adviser, bank manager and accountant


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Further adviceFor tips on choosing an expert adviser pages 10-11


Forecasting your financial needs

Financial forecasting can be tricky. You need toforecast at least one year ahead and includeany supporting assumptions and evidence(order books, sales enquiries, etc). Projectionsshould include a monthly profit and lossaccount, monthly cashflow projections, balancesheets and a capital expenditure budget.

Once youve worked out your projectionsyoull know the total funding needed. You thenneed to explain how you plan to use thosefunds and how youre going to repay them.

For more details about working out acashflow forecast, read our comprehensiveguide at www.businesslink.gov.uk/cashflowand try our sample cashflow projection.

Potential pitfalls

Stephen Pegge, chairman of the small firmspanel for the British Bankers Association, saysthere are some common pitfalls to avoid whenproducing a business plan. Over-optimism isthe biggest problem, he explains. This can

stem from not firmly basing plans on researchevidence. Underestimating costs, especiallywith regard to buildings and refurbishments,is also common. You need to factor in theinevitable delays and the costs of over-running.

Getting the business plan right was vitalfor sporting trip organisers Tours4. Weneeded a thorough plan to show tour operatorinsurance companies and banks that our ideawould work, says founder Daniel Smith.We thought realistically about every businessscenario we would encounter, and as aresult there havent been any nasty surprises.We have stuck to it so far, but a goodbusiness plan should be able to adapt toevery new situation.

For social enterprises, the biggest problemis balancing commercial success withcommunity aims. As Jonathan Bland, chiefexecutive of the Social Enterprise Coalition,explains: Social enterprises operate in achallenging environment. They are deliveringproducts and services in a competitivemarketplace and need to excel in budgeting,business management and innovation. At thesame time, they also have to deliver on theirsocial purpose.

Who can help?

The first port of call for many businesses istheir accountant many accountants offergeneral business advice, as well as help withthe financial side of your enterprise.

Darren Jones,founder of the carebusiness AKC Home

Support Services, admitswriting the business plan

was initially a bit of a chore, but he nowsees it as core to his business:

We set out the financial and strategicgoals we wanted to achieve in the shortand long term. We review the plan annuallynow, unless theres a significant shift

in our market and then we immediatelyre-evaluate our goals.

The plan also helped the company avoidexpanding too quickly, as Darren explains:Early on we were offered work in anothercounty. This seemed great but when welooked at our business plan and

particularly our cashflow forecasts werealised it was more important to establisha firm base in one county before takingon work in another one.

CASE STUDY Discovering the real value of business planning


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For assistance with the details andinformation on appropriate training courses,a good place to try is your local BusinessLink adviser.

Your business account bank manager oryour regional development agency may alsobe worth approaching for advice.

If youre a social enterprise looking forspecialist information on social enterprisebusiness planning, visit the Social Enterprise

Coalition website (www.socialenterprise.org.uk), and see the RBS and Forth Sector

guide at: www.forthsector.org.uk/docs/New_BusPlanGuide.pdf

Legal structures and business plans

To put your business on a proper footingwith HM Revenue & Customs and otherauthorities, you need to make sure that ithas the right legal structure.

Its worth thinking carefully about whichstructure best suits the way you do business,

as this will affect:I The tax and National Insurance you pay


What are the options for structuring my social enterprise andwhat implications do they have on the way I run it?

1 PREPARATION

Legal structure Description Records and accounts Legal liability

Sole traderBusiness run by anindividual registered asself-employed with HMRC

Annual self-assessmenttax return

Personally liable for anybusiness debts

Partnership

Two or more people sharethe risks, costs andresponsibilities. Each

partner is self-employed

Partnership and eachpartner make self-assessment returns. Records

need to show businessincome and expenses

Partners jointly liable fordebts owed by partnership

LimitedLiabilityPartnership(LLP)

Number of individualsor limited companiescome together

Must register at CompaniesHouse. LLP and eachindividual member mustmake self-assessment taxreturns. Must file accountswith Companies House

Liability is limited to theamount of money investedin the business and to anypersonal guarantees given

LimitedLiabilityCompany(LLC)

LLCs exist in their own right.Company finances distinct

from personal finances ofowner. Shareholders can beindividuals or companies

Must register at CompaniesHouse. Accounts audited

annually. Must file accountswith Companies House

Shareholders notresponsible for companys

debts, unless theyve givenguarantees

Franchises

Franchisee buys a licence touse the name, products andservices of the franchiser

Dependent on the businessstructure franchisee selects.Franchisers may expectdetailed financial records

Dependent on the businessstructure franchisee selects.Most are sole traders,partnerships or LLCs

Community

InterestCompany(CIC)

Limited companies withadditional features toensure community benefit

Must register at CompaniesHouse. Must file annualaccounts, annual CIC Report

and annual return

If limited by shares, liabilityis limited to value ofshareholders investment.

Otherwise limited to thenominal sum the memberhas agreed


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I The records and accounts you have to keepI Your financial liability

I The ways your business can raise money

I The way management decisions are made

There are additional considerations for

social enterprises, which will need to choose

the legal form that best protects their core

social purpose and values.

For more information on legal formsfor social enterprise visit the Social

Enterprise Coalitions website atwww.socialenterprise.org.uk/legalI


Further advice

Find out whether you should buy or lease premises pages 28-29

G Use our Business start-up organiser:www.businesslink.gov.uk/startingup

G For more on preparing business plans:www.businesslink.gov.uk/businessplan

G Read our guide to legal structuresat: www.businesslink.gov.uk/

legalstructure

WHERE TO GO NEXT

Profits Funding options Pros Cons

Sole trader keeps allprofits

Money raised from ownassets and/or loans frombanks or other lenders

Straightforward recordkeeping. No registrationfees. You keep all profits

Risky for businesses thatneed a lot of investment

Each partner takes anequal share, unlessagreed otherwise

Money raised from ownassets and/or loans frombanks or other lenders

Share responsibilitiesand risks. Easy to set up

Could be problemsbetween partners.Unlimited liability

Each partner takes anequal share, unlessagreed otherwise

Money raised fromown assets and/or withloans from banks orother lenders

Members have someprotection if business isin trouble. Shared risk,costs and responsibilities

Have to share the profits.More complex to formthan partnership

Usually distributed toshareholders in the formof dividends. Some profitretained as workingcapital

Finance comes fromshareholders, borrowingand retained profits

Reduced personal liability Investors may losemoney if company fails.Additional legal duties

Franchisees may pay apercentage of turnover tofranchiser

Usually franchisee mustfind their own funding,but franchisers maysometimes offer a loan

Reduced risk. Piggy-backon an establishedbusiness

Freedom to manage thebusiness limited byterms of franchiseagreement

Profits are principallyretained within the CIC orapplied for community

benefit. Asset lockrestricts transfer ofassets. Distribution ofprofits to shareholders issubject to a dividend cap

Money raised from ownassets, option of issuingshares, applying for bank

loans or loans from othersources and grants

Familiarity and flexibilityof company form. Helpsidentify company as a

social enterprise

Not suitable forcompanies looking toprincipally distribute

their profits



I am thinking of using my personal savings and assets to fundmy business what are the pros and cons of this form of finance?

2 FUNDING OPTIONS

Self-financingyour business

Using your own funds be it your savings, redundancy money or

cashing in personal assets can be a cost-effective way to raise finance

T

wo out of three small businesses in theUK were started with their founders ownmoney (source: www.thisismoney.co.uk).

But personal cash injections could come inuseful to fund growth at any stage of abusinesss development.

If youre starting a new business, its likelythat youll have to put up some of the moneyyourself. In fact, its usually difficult to borrowfrom a bank or attract other investors unlessyouve invested some of your own cash. Ifyoure not prepared to invest in yourself, thenwhy should anyone else?

If youve got the savings or personal assets,self-funding seems like a cost-effective andlogical way forward. But before investing yourlife savings or remortgaging your home, makesure this really is the best way of financingyour business by drawing up a business plan(for more details, go to pages 12-15),calculating a realistic rate of return anddeciding objectively if its the most sensible

use of your money.But remember, if you dont believe yourbusiness idea is sound enough to put yourown money into, banks and other externalinvestors are unlikely to fund the venture.

If youre having doubts, revisit your businessplan, and if you need an impartial viewpoint,get a friend or adviser to go through it withyou. For tips on choosing an expert adviser,go to pages 10-11.

Even if you put your own money into thebusiness, you may still have to borrow fromthe bank or look for investment from familyand friends, in which case you would need toinclude the interest charged and other fees inyour business plan. For more on getting thebest deal on a loan, go to pages 19-23.

Sources of personal funding

The money you need for your business cancome from a variety of sources:I Personal savings: Make sure you factor lossof interest on your savings into your businessplan. Experts also advise you to keep anemergency rainy-day fund, this should add upto three months spendingI Releasing equity from an existing asset:

For example, could you change your car for acheaper model?I Windfalls: Do you have a maturing ISAthat could release some cash, or perhaps aninheritance or redundancy payment?

IN A NUTSHELL

G Personal funds include savings, shares

and assets such as your house or car

G Can be used at any development stage

G Before you commit the money, make

sure this is the best use of your cash

G Talk to an accountant about tax breaks


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I Credit and charge cards: Fierce competitionin the credit card market means there arecurrently a number of companies offering0 per cent interest on balance transfers. Manysmall businesses are taking advantage of thisby continually transferring their balances fromone card to another, effectively borrowing fornothing. This can be a flexible and convenientshort-term way of borrowing cash, paying billsand making purchases. However, rememberthere may be a fixed annual charge and, if youdont clear your monthly balance within thespecified time, you will run up hefty penalties.

The most important task here is to matchyour funds against your short and long-termfinancing needs. For example, spending onpersonal credit cards shouldonly be done to financeshort-term expenses, or ifyou can take advantage of

any introductory interest-freefinance deals.Avoid using credit cards

to make long-termpurchases interest rates

Paul Kruzycki carried out 18 months ofmeticulous research to find out thathis new real-ale mail-order company,

Ales by Mail, couldnt pay him a salary atfirst. He worked out he needed to save atleast six months living expenses beforetaking the plunge. I knew I needed to

cover my portion of the householdexpenses, says Paul, and some luxurieshad to be put on hold, such as holidays.

Redundancy money from his job as abuilding surveyor helped. Paul split themoney, putting half into an emergency fundand setting aside the rest to pay the

familysexpenseswhile thebusinessgot off theground.

A lucky

opportunityalso came upallowing him to work as a propertyconsultant part time. I now do that twodays a week and spend the rest of the timeon Ales by Mail, explains Paul.

This approach continues to work well.

CASE STUDY Using savings to start up

are high and if you dont make the repaymentsyou will be personally liable.

For long-term finance (to cover start-upcosts or to help finance the purchase of newpremises, for example), you could look atreleasing some of your personal assets.

Remortgaging your home

For many people, the value of their home issubstantially greater than the outstandingmortgage. As a result, remortgaging hasbecome a popular and relatively cheap way toraise long-term business finance.

Its worth talking to your mortgage providerif youre thinking about remortgaging. You mayfind theyre willing to negotiate on interest

rates, rather than risk losingyour business.

If you do have to move yourmortgage, there could be

penalty costs involved. You mayalso have to cover valuation,legal and arrangement fees.Its definitely worth shoppingaround there are fee-free


Further adviceFor tips on getting funding from community, friends and family pages 24-26


19/44

remortgage options on the market. There arealso many commercial organisations thatoffer guidance on mortgage rates, oryou can contact the Financial ServicesAuthority for independent advice seeWhere To Go Next below.

Remortgaging is not a decision to betaken lightly as youre putting your homeat risk. You should only consider securinga loan against personal assets, such asyour home, if you want to make a long-terminvestment in your business. You canthen factor the repayment costs into yourbusiness plan.

Experts also advise against using upall the available equity in the family home.Instead, consider a partial remortgage.Releasing just part of the equity in yourhouse could make an important contributionto your business.

Self-financing

ProsG You dont have to convince others to investGNo waiting around for the money andvirtually no red tapeG If youre using existing funds, youre not tied

in to loan repayments or interest charges, andcan spend the money how you want, withouthaving to justify decisions to external investorsG It will stand you in good stead with financierslater if you need further investment

ConsG If you use up all your savings you mayhave no emergency cash fund left to fall backon experts advise keeping a reserve to coverat least three months worth of expenditureG If your business does not perform asexpected, your personal assets may be at risk if you remortgage your home and cantmake the repayments, it could be repossessedGBe wary of over extending yourself if youborrow too much, you many not have enoughmoney left to cover your living costs while thebusiness gets up and running. I


What will I gain from using my own money or assets to financethe launch of my new business over borrowing from a bank?

G For more on raising funds whileyour business gets started:Business Link

www.businesslink.gov.uk/startupfinance

G For independent advice onmortgages:Financial Services Authority

www.moneymadeclear.fsa.gov.uk/mortgages

G To compare the latest bank rates:British Bankers Association

www.bba.org.uk

WHERE TO GO NEXT

Social enterprises can be self-funded, butit is not always a suitable option. As theyare set up for the benefit of society andcommunities, it is not always appropriate foran individual to risk their own money.

The legal structure of the company maylimit the level of return the individual canreceive for their investment in getting any

self funding back. Community InterestCompanies (CICs) can be self-funded provid-ed you comply with the CIC regulations(www.cicregulator.gov.uk).

Social Enterprises can look at communityfunding options, where an organisation setsup a co-operative owned and controlled by itsmembers. Go to pages 25-26 for more details

SELF-FUNDING SOCIAL ENTERPRISES

2 FUNDING OPTIONS



I dont wish to give up any control of my company, but dont mindtaking on debt. What should I consider when approaching the bank?

2 FUNDING OPTIONS

Getting finance

from the bank

Before you approach your

bank for a loan or overdraft,

prepare your case. We showyou what to look out for and

how to keep the costs down

Seventy per cent of small businesses,including social enterprises, call on theirbank to borrow money. Banks offer

long-term finance in the form of loans andmortgages, and short-term finance throughauthorised overdrafts. But before you approachyour bank, you should first work out why youneed the money and for how long.

For long-term purchases new machineryor premises, for example a loan orcommercial mortgage may be best. Leasingor hire is another option if its equipment youneed for more details go to pages 28-29.

Day-to-day running costs (such as buyingstock) are often best met by authorisedoverdrafts or short-term loans.

When looking at these options, get writtenquotations for each, so you can accuratelycompare total costs, including bank charges.

Loans

If you need the money for more than a year, fora specific purchase or planned expenditure, aloan is a good solution. You agree to pay back

a set amount each month over a specifiedperiod. For long-term borrowing, loans canwork out cheaper than overdrafts. The interestrate will vary depending on your business, sizeof loan, security available and other factors,

but may be on average around 2-3 per centabove the base rate. As repayments arescheduled, a loan lets you plan your budget.

Pros

GRepayments are straightforward and so canbe planned and budgeted for in your forecastG

You dont have to relinquish any control overthe businessG A loan can cost you less in interest paymentsthan an overdraft over the same termG You may get tax relief on interest repayments

IN A NUTSHELL

G First work out what the money is for

and how long youll need it

G Make your case to the bank with yourbusiness plan, putting your own

money into the project and by

providing security

G Short-term costs are usually best

met with an overdraft, long-term with

a loan

G Shop around and negotiate to get the

best deal; get everything in writing

G Study the small print


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Cons

G Being locked in a rigidrepayment schedule canbe a problem if yourcashflow is erraticG You may need to put upsecurity against the loan see the Security Will INeed It? box for detailsG Banks can be reluctant to lend money to new

business owners with no track recordG You may be penalised for settling a loan early

Overdrafts

For a short-term lack of cash, overdrafts area popular solution for many businesses.

Pros

G Flexible you only pay interest on theamount of money you use

G It may be quicker to arrangethan a loan

Cons

G The bank can call in anoverdraft at any timeG You may still have toprovide security

G If youre borrowing to fund a long-termpurchase, an overdraft will probably cost

more than a loanG If you exceed your overdraft limit, you couldpay high interest rates and penalty charges,and your cheques could be bouncedG Overdrafts have to be reviewed regularly.

For more on loans and overdrafts, visitwww.businesslink.gov.uk/bankdebt

Costs involved

Whether you choose a loan or an overdraft, the


The banks overriding concern is that it getsits money back, and thats why it might insistthat a loan or overdraft is secured.

Stephen Pegge, chairman of the BusinessBankers Association small firms panel, sayssecurity is not necessarily needed forsmaller loans, but is for larger amounts.

If your business is a new company, bankswill usually need personal guarantees fromthe backers of your business, such asdirectors and other shareholders. Existingbusinesses often use assets as security;this can be equipment or premises. If thebusiness closes or you sell the asset, thebank has first call on the proceeds. If youare a new company, you may have to rely

on personal assets, such as property, tosupport your guarantee. Of course, thismeans that if the business goes under youcould be forced to sell your home.

Another option is to get a third party toguarantee your loan. If you have no security,you can look into a Small Firms LoanGuarantee (SFLG). The Governmentguarantees 75 per cent of the loan in returnfor an annual premium of 2 per cent. UKbusinesses that have annual turnoversunder 5.6m and are less than five years oldare eligible. For more details, visitwww.businesslink.gov.uk/sflg

More security reduces the lenders riskand you may get a better interest rate. So tryto negotiate based on your available security.

Social enterprises may have little physicalsecurity, which can be a problem. However,social banks, like Triodos Bank, may be more

flexible in the security they accept. Somehave come up with alternative forms, such astapping community members for personalguarantees or using the SFLG scheme.

SECURITY WILL I NEED IT?

If I decide to go for bank finance, how much will it cost meand will I need to provide some form of security?

2 FUNDING OPTIONS



Helen Colley spent five years growingthe premium dessert business,Farmhouse Fare Ltd, which was

recently acquired by Daniels Chilled Foods.Initially the business was funded by the saleof her existing catering firm, a grant from theRural Enterprise Agency and a bank loan.

I went to the bank with an excellentbusiness plan, developed with the help of

my local Business Link, andconvinced them to provide initialfunding, she says.

Helen describes her workingrelationship with her bank assuperb. The key was providingregular financial information. It

also helped that we always managed toexceed budgets, too, she says.

amount you pay back depends on the interestrate charged, the amount you have borrowed,plus any fees or repayments. The interest ratewill be fixed or variable. With a fixed rate, theinterest remains constant throughout yourrepayment period. With a variable rate, theinterest fluctuates with changes to the Bank ofEngland base rate.

Repayment schedules can run from one to15 years; the longer the payback period, themore interest youll pay (but the monthlyrepayments will be lower). However, specialistlenders may be more flexible on repaymentterms. When comparing different loans andoverdrafts, look at the Annual PercentageRate (APR). This is the rate youll be chargedannually once all charges are accounted for.

Check the small print for hidden costs. Forexample, if you want to pay the loan off early,are there penalty charges? Do you needpayment protection insurance?

What the bank looks for

Stephen Pegge, chairman of the small firmspanel for the British Bankers Association, says

banks look at three key areas when deciding tosay yes or no to a loan or overdraft request.The key factor is the person asking for

finance, the impression they make and theirrecord as a business or personal customer,

he explains. We then look at the business andthe business plan, then the proposition: will theinvestment generate sufficient cashflow torepay? This becomes more crucial the biggerthe deal is in relation to the size of business andthe experience the prospective borrower has.

For social enterprises, the situation can bemore complex as they may have little securitywhile founders rarely have a personal financialstake in the business. To help gain funding,Andrew Robinson, who chaired thegovernments working group on SocialEnterprise, Funding and Finance, advisesinvolving the bank or CDFI in the early stages ofplanning. That way the planning process canaccommodate what the bank will need to makethe project fundable, he says.

Other factors banks look at include:I Your business plan: This should includedetails of how you plan to repay the debt. AsStephen Pegge explains, the level of detaildepends on your circumstances. If theresa secondary income, such as wages from aspouse, or the risk is relatively low, wewouldnt expect a great deal of detail, he

says. But if its for a large sum or weredealing with someone new to the bank,we often want more information.I Security: You may be asked for some kindof security, particularly if the loan is over

CASE STUDY Successful banking relationships

Further adviceFor help with producing an effective business plan pages 12-15



What information should I present to my bank in order to obtain aloan, and how much of the agreement will be negotiable?

25,000 or if youre a new business. Seethe box on page 20I Money from you: You can demonstrate yourcommitment by investing your own moneyI Your track record: If you already have anaccount with the bank (either business orpersonal), have you borrowed and repaidearlier loans or overdrafts?I Performance and trading history:Existing businesses may have to show the

last three years accountsI Credit rating: To see the information thatcredit reference agencies hold about you,contact Experian at www.uk.experian.com

Getting the best deal

New business owners often go to their personalbank for funding, but you should comparecharges from at least four banks (for example,how much it costs for cheques, deposits,standing orders and overdraft facilities).

If youre already trading, changing banks isnow much easier than it used to be and it couldsave you money. For more advice, read ourguide to transferring your business accountat www.businesslink.gov.uk/switchbanks

Find out about the banks offering businessbanking accounts, the services offered and thecharges using the British BankersAssociation business account finder atwww.bba.org.uk

Many banks offer free business bankingfor a set period, but find out what chargesapply beyond this. Also find out whatfree banking means it may be free onlyif youre in credit or your turnover is undera certain amount.

When choosing a bank, ask these questions:I What support is offered? Do they have adedicated small business team, will you beallocated a specific adviser and is there supportmaterial, such as free websites and guides?

Rural regeneration organisationRuralnetuk approached a clutch ofsocial banks when it became

independent of the Royal AgriculturalSociety. The organisation needed a 25,000loan for working capital to cover theswitchover period.

Ruralnetuk approached its currentaccount bank, Triodos Bank, as well asCo-op Bank and Charity Bank. Only CharityBank would consider lending on the basisof its business plan and past performance,with the others requiring more traditionalforms of security.

Even without security, Charity Bankwas willing to discuss a working capitalloan based on past performance andprojections, seeking alternative forms of

risk mitigation, such as aguarantee from the tradingarm of the business,confirmation of grants andcontracts and restrictedother borrowings.

For chief executive SimonBerry, the loan applicationprocess was valuable. We had several visitsfrom Charity Bank assessors and they wentthrough the business plan in detail andhelped us look at the business in differentways, he says. They encouraged us topresent information differently, to split down

the figures between the two companies the charity and the trading arm moreexplicitly. If there were any serious flaws inour plan, they would have been uncovered.

CASE STUDY Taking an innovative approach to security

2 FUNDING OPTIONS


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I What services do they offer? For example,

do they have an internet or telephone bankingservice? If so, do they charge for this?I How are charges levied? Is there a fee pertransaction or a one-off charge?I How close is it to your premises? If youare likely to have a lot of transactionsrequiring you to visit the bank, then proximityis a key issue

How to keep banking costs downI Negotiate with your bank manager:Everything is negotiable, from overdraftinterest rates and charges to loan repaymentschedules. Make sure that you get anyspecial terms in writingI Reduce transactions: Try to avoid cash andcheques. Automation such as direct debits,standing orders and internet banking tendsto be cheaperI Review charges regularly: Ask your bankmanager to suggest how to reduce chargesI Earn interest: If you have extra funds, putthem in a high-interest deposit account.For tips on negotiating with banks visitwww.businesslink.gov.uk/banknegotiations

I Make sure the charges are correct: Checkany discrepancies between statementsI Avoid unauthorised overdrafts: Monitor youraccount using telephone and internet banking

What to do if the bank says noOne in 10 business loan applications arerejected. If this happens, find out why, so youcan then revise your plan and try again.

Non-bank capital is also available.

The Community Development FinanceAssociation (CDFA) has a list of possiblesources, with funding usually dependenton the owners being from certaincommunities, as well as taking intoaccount their age and location.

Community Development FinanceInstitutions provide capital to allow individualsor organisations to develop and createwealth in disadvantaged communities orunder-served markets.

Some high-street banks will also work withspecialist lenders on a package of funding forsocial enterprises. I


Further adviceFor tips on borrowing from community, friends and family pages 24-26

G Loans at preferential rates to youngentrepreneurs (18-30 years old):

Princes Trustwww.princes-trust.org.uk

G Find out about your credit history:Equifax

www.equifax.co.uk

CallCredit

www.callcredit.co.uk

G For further information on communitydevelopment finance:

Community Development FinanceAssociation

www.cdfa.org.uk

WHERE TO GO NEXT

You can get tax relief on overdrafts andloans. If youre a sole trader or partner,any interest you pay on a loan for businesspurposes is deductible against your taxable

profits. If you take on a loan to invest in yourbusiness, you get tax relief at your highest rateof tax on the interest you pay. For more details,visit www.businesslink.gov.uk/taxdeductions

CLAIM TAX RELIEF ON LOANS AND OVERDRAFTS


25/44


26/44

G They may want less security, and beprepared to offer a lower interest rate andmore flexible repayments than a bankG You keep the profits within your familyCons

G There is a possible danger of family conflict ifthe loan details are not clearly understoodG If the venture fails, investors may lose moneyG Family members may want involvement withthe day-to-day running of the businessG They may need to request access to theirmoney sooner than you had both planned

Avoiding the pitfalls

Be honest with friends and family. If the bankturned you down for a loan, you will need topass on the reasons why they rejected yourapplication, and you should both study thebusiness plan objectively.

Dont persuade them to lend or invest morethan they can afford to lose. Both you and they

should get professional advice before you dothe deal. For more about advisers, go topages 10-11. Put any agreement in writingand dont rely purely on trust and verbalassurances. The agreement should spell out:

Tom Allason and Jay Bregman needed500,000 to develop vital technology toget eCourier, an online courier

business, off the ground. But as we had notrack record, recalls Tom, the bankswerent going to lend us money.

Getting the first 100,000 to finance

initial development was key, and thiseventually came from Toms stepfather. Heagreed to invest 100,000 on the basis thatwe raise another 400,000, explains Tom.

But Toms stepfather was no pushover.He wanted a full business plan with

detailed financialforecasts. Hisinvestment wascrucial and helpedTom and Jay securea further 200,000from friends.

In return for themoney, theyve had to give up 49 per cent oftheir business in shares, but Tom says: Wehad to get used to the idea that it was muchbetter to have a small slice of somethingbig than a big slice of something small.

Case study Turning family into shareholders

I The nature and timing of return on theinvestment, and the repayment schedule including dates, amounts and interestI Respective responsibilities, such as whetherthe investor will have a role in the businessIWhat happens if your company goes underIWhat happens if you fail to keep up with therepayment schedule

Think about the deal from the investorspoint of view and work out the benefits forthem. For example, can you pay them a betterrate of interest than they are currently gettingfrom a bank savings account? If they invest inthe business, when can they expect to receivea share of the profits, and how much is thatshare likely to amount to?

For more advice on preparing business loanagreements, go to www.businesslink.gov.uk/loanagreements

Funding from like-minded people

Another funding option is to set up aco-operative and get finance from a group oflike-minded people. A co-operative is anorganisation thats owned and democraticallycontrolled by its members and is usually


Further adviceFor tips on drawing up a business plan pages 12-15


27/44

formed by groups with shared goals orparticular ethical reasons for setting upbusiness together.

There are several types of co-operative:

I Workers co-operative owned andcontrolled by its employeesI Consumer co-operative owned andcontrolled by its customersI Community co-operative owned andcontrolled by members of a local community

You must have at least two people to form aco-operative, but theres no upper limit, andany type of business from any sector can beregistered as one. However, a co-operativeshould follow a set of principles. For example,the organisation should have a voluntary andopen membership with democratic membercontrol. Co-operatives should also show aconcern for the community and strong linkswith other co-operatives.

Pros and cons of co-operatives

Pros

G There can be less personal liability forexample, if you register as a limited company,

you could opt to be limited by guarantee,where all members guarantee a nominal sum(say 1 towards the companys debts) and thisis the extent of their personal liabilityG Youre contributing to the communityCons

G You will be giving up a considerable amountof control over the businessG It can be more challenging than running anordinary business, due to the ethical aspectsG There could be conflicts between theaims of the co-operative, the needs of thebusiness and the personal objectives ofindividual members. I


Im looking into setting up a workers co-operative. Are thereany rules or principles that govern how it should be run?

WHERE TO GO NEXT

When the landlords of the Old Crownin Hesket Newmarket in Cumbria,retired from the pub and its small

brewery, a group of locals formed abrewery co-operative to save the business.

The co-operative was set up in 1999 witheach of the 58 members contributing

1,500. There are now 90 members withthe extra investment raised going towardstripling the brewerys capacity.

Profits from the co-operative (20,000 in2006) are split three ways a donation tocharity, reinvestment and member share

dividends, whichlast year was twofirkins of beer or100. Its a dealthat appeals toinvestors, says thebrewerys chairman

Julian Davey.The business is run by a management

committee of seven shareholders who areunpaid. Julian says his members are happywhen theyre well informed, involved in thebusiness and supplied with good beer.

Case study How locals saved a brewery

G For further advice on family businessesand the issues they can face:Institute for Family Business

www.ifb.org.uk

G For details on setting up a co-operative:Co-operatives UK

www.cooperatives-uk.coop

2 FUNDING OPTIONS



I would like to own my own business premises, rather than pay rent what is available, and how can I find the best deal for my business?

2 FUNDING OPTIONS

Premises buy or rent?Business owners often choose to rent property,

but buying may make more financial sense

Before deciding whether to rent or buy

your premises, assess the costs of each

option and get expert advice. New

businesses should ask their local council about

incubator hubs, which offer premises at

preferential rents and provide business

support. This can be particularly helpful for

social enterprises.

Should you buy your own premises?

Pros

G The property could provide income if you

sub-let part of it or let all of it in the future

G Mortgage repayments are often less than

rental payments on the same property

G Youre not exposed to hefty rent increases

G Interest payments are tax deductible

G Greater flexibility over building management

Cons

G Youll need a considerable deposit

G You have to shoulder the burden of additional

responsibilities, such as maintenance costs

Getting a commercial mortgage

If you decide to buy, the most popular financing

choice is a commercial mortgage a loan for a

property used for business. You could use a

mortgage broker to help you get the best deal,

who will negotiate with lenders on your behalf.

Commercial mortgages are flexible and

affordable, but have their downsides. For

example, the lender has a legal claim over the

property until the loan is repaid and, in the

event of non-payment, it can be repossessed.

Lenders will look at the operating and

credit history of your business to work out how

much money to lend. Theyll want to see the

past three years accounts and may ask for a

business plan and personal status references.

Typically, lenders offer a minimum of 25,000

for up to 30 years, funding a maximum of 85 per

cent of the purchase price. However, specialist

lenders may be more flexible on repayment

terms, especially for social enterprises. The

interest rate youre offered will be based on

your business plan, historic business

performance, your deposit and security. I

IN A NUTSHELL

G Shop around for the best deal

G Fixed rates are good for budgetingG Seek expert advice

G For advice on commercial mortgages:

www.businesslink.gov.uk/mortgagesG Contact your council to find out about

local incubator hubs

WHERE TO GO NEXT

I Interest-only periods to help cashflowI Upfront lender and broker feesI Penalties for early repaymentI Closing costs that you might run up

before the ownership of the propertypasses over to youI Compare the Annual Percentage Rate

(APR) with that of other lenders

MORTGAGES: WHAT TO LOOK FOR



I need expensive equipment to produce my product, but I dontwant to use up all of my capital buying it. What are my options?

2 FUNDING OPTIONS

To buy, lease or hire equipmentBuying may not be the best use of your cash, especially as leasing

or hiring can help free more working capital for your business

At some point, usually at the openingstages, youll need equipment or otherassets to help run your business but

should you buy, lease or hire them?Buying items outright sounds the simplest

option; cash purchases often work out cheaperin the long run and the goods are classed asbusiness assets, so can be used as security.But be sure this is the best use of your workingcapital and wont cause cashflow problems.

If you havent got the cash available upfrontbut you still want to own the item, you may

decide to take out a bank loan or overdraft tocover the cost of your purchase. Include theinterest repayments in your calculations andcompare the result against hire or leasingcosts before making your decision.

If you dont need to own the item, considerleasing or hire. Monthly costs are fixed, so youget greater control over your budget and itsa sensible choice if the asset is likely to needreplacing quickly to keep up with your market(for example, specialised technology).

How leasing works

Leasing details vary fromcompany to company butgenerally they fit into twocategories. One of the mostpopular methods is directleasing. With this, you decidewhat asset you need andarrange for a leasing companyto buy it for you on your behalfand then rent it out to you.

The second option ispurchase leaseback, where

you sell an asset you alreadyown (a vehicle, for example)for a fair market value to aleasing company and it thenleases it back to you.

IN A NUTSHELL

G Think about lease or hire if the item has

high maintenance costs or quickly

becomes outdated

G If you expect the item to appreciate in

value, work out if its better to own it

outright rather than hiring or leasing

G Consider hiring items that are only

needed occasionally

Option Good choice if:

Buyingoutright

You need to own the item You have the funds in place for purchase

Leasing You dont need to own the item There are costly maintenance or insurance

costs that are covered by the leasing contract

You dont have the necessary funds in place tobuy the item outright

The asset has high maintenance costs orbecomes out of date over time

Hire

purchase (HP)

You want to own the item eventually

The HP interest rate is cheaper than theinterest on a loan or overdraft you wouldneed to take out to buy the item outright

Hire You only need to use the goods occasionally

WHATS BEST FOR YOUR BUSINESS?



In both of these cases you pay for the assetin regular installments over a fixed period,typically one to five years. You will either haveto return it to the leasing company at the end ofthe lease period (but can request that yourbusiness has exclusive use of the asset), or canarrange ownership for a nominal amount.

If you dont want the complications ofmaintenance and insurance costs, investigatecontract hire. This is often used with vehicles,including extra services, such as maintenance,insurance and repairs, in the monthly costs.

If you want to own the goods, but cant bearthe full cost upfront, consider hire purchase(HP) a way of buying goods on credit.Youre charged interest for the period of theagreement and are usually responsible for theassets maintenance. However, before you gofor HP, compare the costs of getting a bankloan or overdraft to buy the asset outright withthe total cost of paying for the goods on HP.

Finally, if you will need certain equipmentfor your business but will only need to useit occasionally, hiring the asset out on anas-needed basis could prove to be the most

cost-effective choice for you.

Tax and VAT implications

If you buy items either outright or by HP you may be eligible for capital allowances,

which let you offset the cost of some ofyour assets against taxable profits. With HP,the capital allowances are calculated in thesame way as if the asset was bought outright,using the base cost of the asset, excludingthe HP interest element; relief for HP interestpaid on business assets is allowable in theprofit and loss account. For more on capitalallowances, visit www.businesslink.gov.uk/capitalallowances

Although you cant usually claim capitalallowances with leasing or hiring, businessescan deduct the full cost of the lease/hire feespaid from the taxable income as a tradingexpense. The position changed in 2006for some leases over five years, so takeprofessional advice if youre consideringfinancing in excess of five years.

If your company is VAT registered, you canclaim back VAT on the payments for HP, hireand leasing. For more on tax and hiring/leasingvisit www.businesslink.gov.uk/taxdeductions I

Further adviceFor tips about improving your businesss cashflow pages 34-37

G For further details about leasingoptions from various companies:Finance & Leasing Association

www.fla.org.uk

WHERE TO GO NEXT

Alexandra Tool Hire Ltd provides hiretools and equipment. They need awide range of equipment to hire out

to customers an expensive upfront cost.When they originally started, this wasfinanced through a conventional businessloan from the bank. However, when they

needed two trucks, they decided to use hirepurchase (HP). Managing director Bob Rist

explains: Wegot the truckson HP as itmade financialsense to us. Theagreement runsfor three years, after which we own them.

We claim the payments as a businessexpense and can recover the VAT on them.

CASE STUDY Mixing buying and hiring



I have heard about financial assistance available fornew businesses. What might mine be entitled to?

2 FUNDING OPTIONS

Is my business eligible for a grant?There may be government cash to help you if you know where to look

Agrant is money given to new or existingbusinesses for a specific project orpurpose. For example, The Princes

Trust (visit www.princes-trust.org.uk) awardsmoney to young entrepreneurs aged 18-30to help start new ventures, while otheragencies fund new projects, such as movinginto export, for existing businesses. Across thevarious schemes in the UK, theres 5bn worthof development capital available annually.

Grants give a cash influx you dont have torepay, and you dont have to give up a share ofyour business. But finding schemes is tricky,the application process can be slow andcompetitive, and the criteria can be stringent.Dont get too wrapped up in chasing grantfunding as it can mean youre not focusing onrunning your business. You should also look atgrants as only part of thefunding solution. Itsimportant to maintain abalanced range of incomestreams and to have a plan forwhat happens when grantfunding stops.

Who hands out the money?

There are more than 2,000 UKbusiness grant schemes. Tofind out what grants areavailable in your area visit the

Business Link grants database atwww.businesslink.gov.uk/support and theGovernment Funding site at www.governmentfunding.org.uk. There are also thousands ofgrants specifically for social enterprises.Your local council or Regional DevelopmentAgency (RDA) should help you track downgrants in your area.

Grant eligibility

Grants are almost always for proposedprojects, not ones underway. Specifiedpurposes include starting up a new businessor opening a branch in an area that needseconomic regeneration. There are strict termsand conditions applied to grants; if theyre notfollowed, you may have to pay back the money.

You might, for example get between 15-50per cent of the costs of theproject funded by a grant.This may increase for socialenterprises. Whats more,social enterprises may findthey have continued access togrants because of theadditional social outcomes

they can generate.

Applying for grants

Your local Business Link officewill help identify relevant

IN A NUTSHELL

G Your local Business Link office

can advise you on grant eligibility

and allowances

G

You will probably have to part-fundthe project yourself

G Grants tend to be for new projects

G You also need costings and project

information before you apply

G The grant application process may distractyou from running your business


32/44

European, national and local grant schemes,and will contact them to check your eligibility.Before you apply, youll need to provide:I The projects details and its potential benefitsI A comprehensive work-plan with full costingsI Details of your relevant experience and thatof your key managers

For more detail on grant applications, visitwww.businesslink.gov.uk/grants

Your proposal will be assessed on itsrelevance to the grants aims, your approachand your expertise. Applications usually fail ifthe business plan is unrealistic, if there are nomatched funds from the applicant, or if itsunclear how important the funds are to theprojects success. Andrew Diggle, a director ofa grant search company, advises businesses toshow restraint even if they do get a grant: Themoney will take from several weeks to a year tocome through and you wont be reimbursed forpayments you make beforehand.

Other government allowances

Your business could also be eligible for othergovernment schemes. For example, theres arange of tax allowances for new businesses,

Daniel Smith set up Tours4, a companyorganising sporting trips acrossEurope, in 2005 with his business

partner Sam Jennings. Both were straightout of university, so they looked for advicefrom every source they could find, includingthe The Princes Trust, local councils and

Business Link, which suggested they applyfor a web development grant.

We were given a list of six Business Linkauthorised web designers to work with,explains Daniel. I went to see each of themand got quotes. We chose a company that

took usthrough everystep of theprocess.

BusinessLink washappy with

the quote and offered to contribute 1,600towards the costs.

If you dont ask, you dont get, saysDaniel. Weve asked for discounts, freeadvice and grants. As a result, weve saveda lot of money.

CASE STUDY Getting a website grant

including capital allowances for investmentin equipment and premises (so you candeduct a proportion of these costs fromyour taxable profits over several years) andstamp duty relief in disadvantaged areas.Visit www.businesslink.gov.uk/taxbreak tosee a list of the tax advantages available.

Tax credits and tax allowances may also beavailable for businesses to research anddevelop new products, processes or services.Visit www.inlandrevenue.gov.uk/randd

You could also be eligible for non-financialsupport, such as free business planningcourses, networking events and bookkeepingtraining. Visit www.businesslink.gov.uk formore details of these services. I

Further adviceIdeas for making the most of your existing resources pages 16-18


G For more details on grants visit:Grants and Support Directory:

www.businesslink.gov.uk/support

G For details of government funding visitwww.governmentfunding.org.uk

WHERE TO GO NEXT



E

quity investors put up money in returnfor a share in a business. This meansyou dont need security and may not

have to repay the cash. Investors hope to gettheir money back, including profits, either byselling shares or through dividends.

However, you will have to relinquish somecontrol over your company (for example,investors may want a seat on the board) andgive up a share of your profits.

Potential investors will want details ofpossible exit routes, so they can see howthey will be able to release their investment,plus profits.

Where and when to get equity finance

Many small businesses launch with fundingfrom friends and family (for more, go topages 24-26). This may be an equityarrangement, where they take a stake in yourbusiness. Alternatively, you could approachinvestors such as business angels wealthy

individuals who typically invest between10,000 and 750,000 either alone or as partof a syndicate.

Equity funding is suited to all stages ofdevelopment. Business angels typically provide

cash in the early stages, but can also help, forinstance, if an existing business needs furtherfunding to develop a new product.

What type of businesses get funding

High growth is often the key. If yourbusiness cant support significant highgrowth rates, you may not be able to attractequity funding. Business angels are alsolooking for products with a competitive edge,companies with an effective managementteam, an exit route with a strong returnon their investment and for businessesmatching their sector preferences.

What else angels offer and how to find one

Business angels can do more than justprovide money. Theyre often experiencedentrepreneurs who can help you plan or runyour business. They may have valuablebusiness contacts, or they could help youdevelop your own management skills. TheBritish Business Angels Association

Are there ways to raise funds without taking on more debt perhaps by offering investors a share in future profits?

Attracting investorsSwapping a stake in your organisation for investment can help it grow

IN A NUTSHELL

Equity funding could be for you if:

G Youre prepared to give up a share

of your business and its profitsG Your business can support a

significant high growth rate

G Youre looking for expert advice as

well as a cash injection

Specialisttechnologycompany d3o Labdeveloped a newshock-absorptionmaterial that theywanted to produce

and sell. Founder Richard Palmer

needed funds to exploit the opportunity:We needed a substantial investmentwithout ceding too much day-to-daycontrol, so angel funding was ideal.

CASE STUDY Business angels

2 FUNDING OPTIONS


34/44

(www.bbaa.org.uk) can help you find asuitable investor. For more on equity finance,visit www.businesslink.gov.uk/equity

If you require a larger investment, or wantmore information on angels, see theNo-Nonsense Guide to Finance for HighGrowth Companies.

Social enterprises and investment

Social enterprises shouldnt automaticallydismiss the equity route. CommunityInterest Companies (CICs) are able to setthemselves up as organisations limited byshares (for more on the structure of CICs,see page 14), which means that they areable to sell shares to people wishing toinvest in the company.

However, conventional venture capitalists

(VCs) wont be able to help someorganisations, due to the need to provideinvestors with a substantial financial returnand an exit route. As a result, theres ademand for some form of patient finance,


Fairfields MaterialsManagement isManchesters first

commercial compostproducer. The businesstakes waste deliveries andturns them into compost.

Traditional grant fundingwas not sufficient to start up the project,so the organisation approached theAdventure Capital Fund (ACF), whichspecialises in funding social enterprises.Fairfields received money from the ACF inthree stages.

The money was used for setting up andthen funding more composting units, says

Emma Smith, project development managerat Fairfields.

Later on, we expanded and needed somemoney to keep us going. The ACFs fundingwas a massive help, because the differentstages helped us start off, expand and keepgoing when things got difficult.

Representatives from ACF also visitedEmma on site and provided her withvaluable support.

They helped me to identify areas where Ineeded to grow, she explains.

For example, at the outset the fundidentified that I needed to improve myfinancial management and they gave me thesupport to help me do this.

CASE STUDY Where theres muck, theres brass

G For more information about equityfinance visit:Business Link

www.businesslink.gov.uk/equity

G For information about patient fundingoptions, visit:Business Link

www.businesslink.gov.uk/financeyoursocialenterprise

WHERE TO GO NEXT

Further adviceFor tips on improving cashflow pages 34-37

where investors are willing to acceptlower financial returns in exchange for thesocial benefits that are generated by theenterprises activities.

Patient capital is available through anumber of charitable trusts, government-funded pilots and socially motivatedindividuals (for further information seeWhere to go Next). I



Cashflow management the flow of

money into and out of your business

is a key priority for any small business.

The Federation of Small Businesses

estimates a quarter of all business failures

are the result of interruptions to cashflow.

You might have plenty of orders coming in,

but if youre regularly short of cash to cover

monthly necessities, such as staff wages, you

have got a cashflow problem. Maybe you are

late getting your invoices out, or customers pay

late, or you have too much money tied up in

slow-moving stock. Whatever the reason, it

needs to be identified and addressed.

Get the money rolling in quicker

Late payment is a big concern for small

businesses. Its estimated that small and

medium-sized companies are owed 17bn

from debtors at any one time, and

approximately 10,000

Documents

No-Nonsense Guide to small business funding