On a recent family holiday down-under in Australia, my 3-year-old, Harvey, was particularly excited about visiting the Wildlife Park in Perth. He couldn’t wait for a chance to see and interact with all the animals he’d only ever seen in books up to that point in time.
So when Harvey got his first real chance to meet a koala bear, and get his photo taken alongside it, you can imagine what I was thinking as we walked away to the question: “Daddy, can we buy a koala bear please?”
The only answer that I could think of was “sorry son, we can’t afford one”, to which his immediate retort was “won’t anyone lend us the money?” (Kids!)
Now, I’ve been asked to find sources of finance before for clients, for some fairly exceptional purposes, but I’m convinced this one would top the lot!
Sources of financing is a very hot subject at the moment for some clients, particularly with a wide array of uncertain economic and political pressures thrown into the pot, so I thought it would be useful to give you some summary thoughts on the potential sources of finance out there, and how they might be accessed.
These generally break down into two areas – either Equity Funding or Debt Funding.
When considering Equity Funding:
- It is often available for start-up or higher risk ventures, where the usual forms of security may not be available to offer a lender, but usually involves being prepared to give a share of your business away in return.
- Any investor, as well as taking a stake in the business, will often also want to be involved in the management side of the business (maybe not on a day-to-day basis, but very often at a higher, strategic level).
- Equity investors will also often want accurate financial reports on a fairly regular basis, and management reporting to be accountable for the results being achieved, whether they are positive or negative in nature.
- Time spent arranging equity finance and investors, and costs around handling such activities, may not always be tax deductible.
- There are some good tax incentives that exist to try to encourage wealthy investors to consider equity investment as an option for their funds, rather than potentially easier, safer investments that often don’t secure very good returns.
Useful points of reference include:
- www.ukbusinessangelsassociation.org.uk (for business angles information)
- www.bvca.co.uk (for venture capital information)
- www.ukcfa.org.uk (for crowd funding information)
When considering Debt Funding:
- Loans and/or overdrafts may be available, which ensure amounts to repay any borrowing are agreed at the outset, and are not usually linked to actual business performance.
- Funding like this is often required to be supported by security, either in the form of assets within the business, or even other personal assets of the business owners.
- Although forecasts and financial information on performance would be required, provided the debt is being serviced in accordance with the agreed terms, and the general performance is better than minimal expectations, often the lender will avoid any further interference in the operations of the business.
- Costs associated with such lending are often much lower, and are usually also tax deductible.
Again, some useful points of reference include:
- www.bba.org.uk (for general banking information)
- www.fla.org.uk (for asset finance lending information)
- www.p2pfa.org.uk (for peer-to-peer lending information)
One thing is for certain, regardless of the source of financing preferred, a solid business plan is vital, helping to provide both investors and lenders with confidence in both the goals of the business and the potential/risks inherent in any financial forecasts.
Now, I am still waiting on Harvey’s formal business plan for his proposed koala purchase, but as I had to explain to him on bended knee in Oz, no one lends money without understanding the financial repercussions – his response? “Daddy, can I have an ice cream instead?”
Author: Graham Taylor, Director, Langdowns DFK