One of the most critical aspects of running a business is managing your cash flow. To ensure that your business survives, it is important to ensure that you have the correct finance in place to ensure that you do not run out of funds.
Different Types of Funding
Debt Finance
Debt finance for your business is simply a loan or a form of finance for example, an overdraft facility that comes from a lending institution like a bank.
Advantages
- the bank is not controlling how you run your company, and once the loan is paid off your relationship with the lender ends.
- the interest that you pay on the debt finance is tax deductible as a business expense.
- the repayment schedule and amount is known, so you can plan in advance accurately as to what you need to repay each month in your financial forecasts.
Disadvantage
- it significantly increases your overheads (link to business costs) of the business, so you will need to be confident that you can repay it, even when sales are not as expected.
- Debt finance can be difficult to obtain if you have a limited track record or if the economy is suffering as the banks will be more risk averse.
The British Business Bank has produced a really useful guide for small businesses; Managing Business Debt which looks at Debt Finance and how to improve cash flow.
Equity Finance
Equity finance is where an investor (either an individual or another company), invests money in your business in return for a share of the ownership ( and profits) of your business.
Advantage
- a business is not burdened with monthly loan repayments, and there is often more liquid cash on hand to cover the operating expenses.
- As the investor will own a share in the business, they will also take a share of the risk, so if things don’t work out and the business fails, the loss is shared across all the owners.
Disadvantages
- you will have a new partner in the business, who will have some say in how it is run and what you do, and take a share of the profit, and the larger the risk, the higher the share in your company will be needed to secure the investment
- if you give away more than 50% of the shares then you will no longer have control of your business.
More Information
For more information regarding raising finance for your business visit the following links;
The British Business Bank and PwC Raise have collaborated on a three-part webinar series to support smaller businesses. Covering investor readiness, valuations and term sheets, these webinars are available to view on demand;
- Investor Readiness - How to best prepare for a fundraiser - an overview of the funding process and insights into the funding landscape
- Valuations - Considerations around discussing valuations with an investor and insights into the methods used by investors to value a business
- The term sheet explained - Focusing on the Term Sheet, this webinar explains the core deal terms to be negotiated that will define a business's funding round.