There are countless funding options, broadly speaking these can be classified as follows:
- Internal sources of funding
- Grants and State financial supports
- Debt funding
- Equity funding
- Internal sources of funding
Do you have a capital asset that is no longer used in your business? If so, can this be sold to fund your business? You should take care not to accept a lower price in order to make a hasty sell, and be certain that you won’t require the asset again.
A second internal source of funding is your working capital. Do you have old or obsolete stock that can be sold at a discount to generate some cash?
Do you have aged debt that you can call in, i.e. are amounts owed by customers extending beyond agreed credit terms? Note that if this is happening continuously, processes may need to be reviewed.
A further source of internal funding is trade creditors. Do you pay as soon as you receive bills? You can use credit extended to you to provide short term funding.
Debtors and creditors should be broadly in line – cash received from customers should be used to settle purchases.
Retained profits can also be used to fund business activity – i.e. leaving cash in the business as opposed to paying a dividend.
- Grants and State Financial Supports
There are a wealth of grants and financial supports available to businesses from a myriad of State agencies and departments. From shop front grants to priming grants, from microfinance loans to employee schemes, from Trading Online Vouchers to export grants – there is a huge amount of support for businesses in Ireland.
The best way to get a handle on what is available to your business is to visit www.supportingsmes.ie and answer the 8 simple questions.
- Debt Funding
Often the first port of call for business owners, their bank. Often the first port of call that business owners consider when trying to obtain finance is their own bank or Credit Union.
Funding can be provided either in the form of a loan or an overdraft.
Overdrafts are a very flexible form of finance which, with a healthy income in your business, can be paid off more quickly than a formal loan. On the downside, overdrafts are repayable on demand, which means the bank can call in repayment at any time.
The advantages of a fixed term loan include regular repayments, which makes cash flow forecasting and budgeting more certain. Additionally, unless you are failing to make payments on your loan, the bank cannot withdraw finance.
Many smaller loans will not require any security but, if more substantial amounts of money are required, then the bank will certainly ask for some form of security.
It is common for business owners to offer their own homes as security although more risk-averse borrowers may prefer not to do this. Anyone offering their house as security should consult with any co-owners so that they are fully aware of the situation and of any possible consequences.
- Equity Funding
You may consider selling a stake in your business in order to fund strategic plans.
Advantages of this form of finance include commitment from investors which could benefit your business and forgoing the costs of servicing bank loans or debt finance, allowing you to use the capital for business activities.
However, there are drawbacks of equity finance too. It’s worth considering that raising equity finance is demanding, costly and time consuming. Potential investors will seek comprehensive background information on you and your business. You will lose a certain amount of your power to make management decisions and you will have to invest management time to provide regular information for the investor. In addition, there can be legal and regulatory issues to comply with when raising finance.
In order to access certain external sources of finance, a comprehensive business plan will be required as a minimum, in addition to historical financial statements and management accounts. It’s important that business owners have a sound understanding of what exactly they are seeking funding for, and of their business’s finances.