If you’ve come to the conclusion that you require additional investment in order to catapult your company forward, you’ll be wondering what the best financing option for your business is.
There are a number of different ways to go about financing your business and it’s important that you carefully consider all of them before you take the next step.
Funding your business can be something of a minefield, with the explosion of alternative lenders in recent. So, to bring about some clarity, it’s helpful to understand that there are really only three ways any business can be funded: debt, equity and retained earnings.
So, what’s the best financing option for a business like yours?
Bootstrapping is building a company from the ground up with nothing but personal savings and cash generated by the business. It’s a preferred option of those directors who want to keep complete ownership and control over their business, and who are wary of growing too quickly.
In that sense, bootstrapping keeps things fairly straightforward – you only pursue an opportunity to grow if the financials fit, otherwise you pass it up. As you’re not borrowing any money, there’s no risk of defaulting on a loan or having to give away equity to an investor.
However, this method of business financing can result in agonisingly slow business growth and having to turn away some big (potentially lucrative) clients because you don’t have the infrastructure or the capacity to take on the extra work. It can also make the day-to-day running of your business a daily challenge, with cash flow having to be meticulously managed to ensure there’s some money being left in the bank to fuel future growth.
Popularised by the BBC TV series Dragons’ Den, equity funding means selling a stake or a shareholding in your business, to individuals or investment companies.
As you’re giving away some of your company in exchange for cash, you might have to consult those investors before making big business decisions. For some directors, this loss of control is viewed as a risk and a negative – but what you’re likely to get in return could well outweigh any misgivings you have about selling equity.
If you partner with experienced investors, you’ll potentially have access to their knowledge and contacts; their advice when making crucial business decisions could be the difference between you growing the company and standing still.
Equity investors have as much to gain as you do from your business being a success. While they don't get interest or need to have their capital repaid by a certain date, they’ll expect some sort of return on their investment.
And remember, it’s up to you how much of your business you’re prepared to give away. If you only seek a small proportion (of the value of your business) from an investor, it’ll still be yours to lead moving forward.
For many, borrowing money is their only way of starting and growing a business. Borrowing money lets you hang onto complete ownership of the business, but it comes with obvious risks.
When you borrow money, there’s pressure on you and the business to make a success of things, so that you can pay back the borrowed cash and hold onto to your assets. If you fail to keep up with repayments, the lender may be entitled to seek to take payment in the form of your business and even personal assets.
If you sign a Personal Guarantee, you agree to become personally liable for the company’s debt in the case of a default. Again, while this might sound less than appealing, it can help secure the funding that you need to say ‘yes’ to new opportunities and grow your business. Plus, there are now ways to moderate your risk having signed a Personal Guarantee, in the form of Personal Guarantee Insurance.
If you decide that the best financing option for a business like yours is to self-fund your growth, consider that this could result in opportunities being missed, competitors gaining an upper hand, and becoming over dependent on a small customer base.
It all depends on your personal risk mindset – but be assured that there will be a financing option to match if you look hard enough.
Purbeck offers Personal Guarantee Insurance for SME Directors who have business loans or financial agreements. We cover up to 80% of your risk, giving you peace of mind as you plan the future growth of your business. Please contact one of our specialists today to learn more on 0208 004 7252.