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Need Money?

At some stage, every business will need additional funds. Ideally, this comes at a time when you have already generated funds salted away from past profits, but from time to time, you may need the extra money to “prime the pump” and make more money.

Here are eight options to source an injection of funds.

It is important to note that they are not in any natural order of preference – the circumstances must meet the potential source, and you do have to weigh the pros and cons of each option, in accordance with what you need the money for, how long you will need it, and what you are prepared to give away for it.

Option 1 – Borrow from friends or family

This is probably the easiest source of finance, and may well be the cheapest source of finance. However it is unlikely that your friends or family have access to significant sums of cash that they can lend to you quickly or for long periods of time. So this option is usually limited to smaller sums of finance.

Be careful of the old adage that you should not do business with friends or family – a lot of families and close friendships have been decimated by the loss of money. Make sure they, and you, are fully aware of what the consequences could be. Not only may the relationship be rocked, but if you were to lose their life’s savings, what would happen to them financially?

Despite the close relationships, treat the loan as a business loan. Write up an agreement, agree the terms, including interest (even if none), and the repayment schedule, as well as any specific recourse on non-payment.

Option 2 – Put up your house

Nowadays, it is unlikely that third party lenders will lend you any large sums of money without taking some sort of collateral. You can put up equipment, or shares in your business, but usually your house will provide the most secure form of collateral that lenders love.

Putting up your house as security for a loan will increase your chances of obtaining a reasonable loan from a bank at good commercial interest rates (slightly higher than a home mortgage and less than an unsecured or poorly secured loan. It’s all a matter of risk – when they hold a safe asset like your house as security, they are more inclined to take the risk, and earn a little less in interest.

However, remember – if you fail to repay the loan, you could lose the house! Are you prepared to take the risk?

Option 3 – Angels

While not particularly easy to find (or convince) Angel Investors do exist.

These are generally experienced business people, retired or semi-retired, who have themselves been financially successful and have accumulated sufficient wealth to take a chance on financing good opportunities. They will be looking for specific niches and opportunities which have been well researched by you, accompanied by a solid business plan and showing capacity for solid returns, or capital gains.

Not dissimilar to venture capital (see below) except that the funds are likely to be in the low to medium range, Angel investors look to providing their experience in running a business along with their capital. This means that you need to be prepared to give up some equity, and have a partner on the Board. You may be able to negotiate a “buy-back” term where you can buy back the equity following an agreed formula for valuation at a set time.

Apart from web based access to Angel investors (Google it!) you may have a local association or network of Angel investors you can approach.

Option 4 – Venture Capital

Venture capitalists or private equity lenders put together one or more high net worth individuals with businesses that require capital for growth.

Funds committed are higher than in private Angel investment networks and the business will be gone over with a fine tooth comb.

This is serious investment. If your business is ready for some serious investment, there are various private equity lenders and venture capital funds you can talk to. You will again have to give up some equity – these are investors, not lenders – and you will have one or more people who will come on your Board, and potentially they may ask that you employ someone from their network in management.

Option 5 – Government Grants

Depending on your business and what you need the cash for, you may be able to access government grants.

Various governments have small business development and enterprise agencies as well as research and development and export marketing grants.

Option 6 – Vendor financing

If you need money to buy equipment, or another business, or something similar, vendor financing may be available.

Vendor financing is where the vendor of the equipment or other asset sells you the asset but you repay them over time with interest. In effect, they lend you the cash to buy their asset.

Large plant and equipment supply companies like Caterpillar or John Deere, or IBM, provide in-house finance to make the sale.

If you are buying a business, the vendor may be interested in funding your purchase of the business if he doesn’t need the cash up-front.

A variation of vendor financing is of course third party leasing or hire-purchase. Banks and finance companies can provide this form of finance, secured only on the asset being bought. Interest is generally higher than a normal loan (once again, risk versus reward) except in recent years where particular industries are offering low finance for you to buy their product. For example luxury car companies have been offering 5 year interest free hire-purchase schemes to boost sales.

Option 7 – Debtor financing

Is your business working capital poor because you are paying your suppliers faster than you are collecting from your customers? Are your debtor lists made up of strong, stable customers who will pay in full but just take some time?

Finance companies who specialise in this form of lending will lend you 80% – 85% of your debtor list up-front, and then pay themselves from the collections. The interest is taken as they collect so that in effect you only receive say 90% of the debt in the end.

Debtor lenders will only lend on good receivables lists, and if any debtors default, you have to make it up, so, if your debtors are not only late but likely to default, this is probably not appropriate for you.

Option 8 – The Plastic Fantastic or your Credit Card

I said this list of 8 financing sources were not in any natural order of preference – but as an exception, I placed this last.

Credit card lending has the highest interest rates of any other source, sometimes as high as 25% per annum! This is not a first choice! It’s not even a choice you would want to take if you were in dire straits simply because the payment terms are likely to push you further into trouble.

However, your credit card is worth considering as a source of funding if you fit the circumstances; you are paying for a product and not drawing cash (if you draw cash on your credit card interest is applied on day one, if on a purchase interest is applied after the account payment date), if it’s for cash flow purposes only and the timing of your sales means that you can pay the account in full when you receive the statement.

If you play your cards right, you can get up to 55 days interest free money.

So, there you have it – eight possible sources of funds when your business needs extra cash. Be careful though, you need to look at each as horses for courses, be quite clear why you need the money, when you are in a position to pay it off, consider the pros and cons of each option.

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