To raise money to grow your business, you have to convince likely lenders that your idea is profitable, or at least has the potential to be.
There are many different types of finance available, depending on your needs and goals. Raising cash for day-to-day needs (working capital) is quite different from raising money for a long-term capital project - say, for buying new machinery or property. You need to be clear to financiers about the way you intend to invest the money.
Sources of finance include:
Any property given as security which may include your home, may be repossessed if you do not keep up repayments on your mortgage or other debts secured on it.
All lending is subject to a satisfactory credit assessment.
Credit is, in effect, borrowing from your suppliers and can take many forms. The most basic - payment terms - simply involves negotiating a set period of time before you have to pay suppliers.
Payment terms tend to be standard. Large or long-standing customers may be able to negotiate better terms.
Credit can help with cashflow but don't consider money on credit as capital eg to buy a new car or carry out property improvements. Effectively, all you have done is delay payment - you still have to pay your suppliers, and pay VAT on sales (if you are VAT-registered).
Read our guides:
Many small businesses use a bank overdraft. It's a flexible way to cover short-term, day-to-day business requirements, for example, if the obligation to pay occurs before the receipt of the price on sale.
If your account remains overdrawn for a long period of time, an overdraft is probably not your best finance option as you could end up paying a lot of interest. There may be alternatives you can discuss with your bank.
Remember, too, that an overdraft is repayable on demand.
Read our guide: Choosing a business bank account
Loans are the traditional source of finance for small businesses and are usually used to finance buying assets and to meet other longer-term capital needs. With loans, you know how much you have to pay back, for how long. You may be able to negotiate repayment terms and interest rates.
Banks are the obvious, safe option to find a loan. If your bank won't give you a loan, it may be for a very good reason that you need to consider, such as a flaw in your financial planning.
Bear in mind that lenders may require security, or that the loan is backed by some form of personal guarantee - failure to make payments can have serious consequences.
There are other specialist sources available, but these are best considered only if you have experience of the financial sector.
If family and friends lend you money, make a formal agreement on paper so that everyone knows where they stand.
Leasing or contract hire are simple ways to fund the purchase of capital items like machine tools, cars or computers. Effectively, you hire the equipment over a long, fixed period at a preferential rate. Several types of arrangement are available, each with its own tax implications.
Factoring releases cash to boost your cashflow, using your outstanding invoices as security. As soon as you raise an invoice, the factor releases up to 90 per cent of its value to you, before your customer pays. When the invoice is paid, the factor pays you the balance, minus a charge.
Factoring lets you release cash tied up in unpaid invoices. This can help your business if it needs additional working capital. A related alternative is invoice discounting: here you collect the money, so your customers aren't always aware you have borrowed money against their debt.
One way to raise extra capital is to sell shares in your company to workers, family, friends, the public, or professional investors. They become partial owners of the company. Their rights will depend on any agreements made between shareholders and the proportion of the capital sold.
Typically the managers of a business should own a substantial equity stake. This means they have a personal interest in its success, which reassures other investors too.
Other shareholders may include investors who are not involved in day-to-day business affairs, but they can often be very vigilant, expecting a regular return on their investment. If they don't see a regular return, they may use their voting rights to make changes in the business.
Private investors - or business angels - also invest money in return for equity. Some want the kudos of being involved without taking an active role; others may be more hands-on, investing expertise as well as money. Some angels become employees. All are looking for a return on their investment, usually within three to five years.
Venture capitalists are often prepared to make significant investment in return for equity. They are looking for businesses with a solid business plan and a good track record - typically with at least three years' trading and turnover of at least £1million.
Grants come in all shapes and sizes, from Europe, Westminster, the Scottish Parliament, the Welsh Assembly and local authorities. Such is the available range that there are specialist consultants who can advise you on which grants to apply for. Business Link (or equivalent) can also advise. The web is a good source of grant information.
Most grant providers are looking for two things:
When considering making an application, bear in mind that:
To have a good chance of securing funding, businesses typically need to show:
A solid, well-established business, with steady sales and profits, and a good balance sheet, should have little difficulty in raising appropriate funding.
Read our guide: Understanding profit and loss
If your business has no track record, investors will look at the individuals running it. In particular, they will look for:
Every successful business requires a detailed business plan. For a detailed explanation of what's required, read our guide: Writing your business plan
Many potentially good businesses fail because they have cashflow problems and lack good financial controls. This makes investors wary.
Existing businesses looking for finance must have systems in place to address cashflow problems. But what can new businesses do to prove rigorous financial discipline?
Having an experienced accountant reassures investors. You can use him/her to:
Always consider asking your bank too, which can offer a wealth of financial experience too.
Investors often look for you to have the confidence to put your own money into your business. This need not be a large percentage of the total capital, but enough to show that you are totally committed.
Security is a final fallback position, but investors must always consider the worst-case scenario. In the event of failure, they may look to get their money back from two sources:
The assets of a failed business may not amount to much. Employees and the taxman are paid before lenders, and lenders before shareholders, who may get little or nothing. The resale value of unused stock, plant and machinery is usually far below what you paid for them.
If the business is a limited company, with some legal exceptions, the shareholders' liability is confined to the value of their shareholding.
So lenders may ask for some form of personal guarantee. This may be more as proof of your commitment than for its monetary value. Nevertheless, if your business is not a limited company, your personal assets - most significantly your home - may then be used to pay off business debts.
The Government's Enterprise Finance Guarantee, administered by the banks, provides the guarantee for loans made to new or existing businesses that have a solid business plan but lack the necessary personal or business assets to secure normal borrowing.
Back to top
All lending is subject to a satisfactory credit assessment and we will need your permission to carry out a credit check on you and your business.
You should not apply for an amount that you cannot comfortably afford to repay now and in the future to avoid the possibility of legal action.
Lloyds TSB Bank plc and Lloyds TSB Scotland plc are authorised and regulated by the Financial Services Authority under numbers 119278 and 191240 respectively.
Licensed under the Consumer Credit Act 1974 under registration numbers 0004685 and 0198797 respectively. We subscribe to The Lending Code; copies of the Code can be obtained from www.lendingstandardsboard.org.uk
Both companies are covered by the Financial Services Compensation Scheme and the Financial Ombudsman Service. (Please note that due to the schemes' eligibility criteria not all Lloyds TSB Commercial Banking customers will be covered by these schemes.)
Factoring, Invoice Discounting, Hire Purchase and Leasing facilities are provided by Lloyds TSB Commercial Finance. When using these products and services your agreement will be with the Lloyds Banking Group whose terms and conditions will apply. Lloyds TSB Commercial Finance is a trading name of Lloyds TSB Commercial Finance Limited.
The Lloyds Banking Group includes Lloyds TSB Bank plc and a number of other companies using brands including Lloyds TSB, Halifax and Bank of Scotland, and their associated companies.
Calls may be monitored or recorded in case we need to check we have carried out your instructions correctly and to help improve our quality of service. We accept calls via Text Relay.
While all reasonable care has been taken to ensure that the information in this website is accurate, no liability is accepted by Lloyds TSB for any loss or damage caused to any person relying on any statement or omission in the content of this website. The content of this website is provided for information only and should not be relied on as offering guidance for any set of circumstances and specific guidance should always be sought in each instance.