Types of finance providers

Unless you’re fortunate enough to have a savings account bursting at the seams, you’re probably going to have to find another way of financing your business purchase.

But there’s more to the process than simply approaching the bank, cap in hand. A somewhat bewildering range of finance providers and finance options are open to business buyers. You need to decide which options are viable in your circumstances, and which ones will suit you best.

Three types of finance are available to business buyers: loans, share capital and grants. Share capital means you are getting finance in return for equity – a share of your business.
What follows is a rundown of the main types of finance providers businesses use.

You need to decide which options are viable in your circumstances

BANKS

Banks offer many different types of loan and interest rates are higher or lower in inverse correlation to the risk you are prepared to shoulder (for example, using your house as security means rates will be lower).
Banks are conservative in their lending so you must present a convincing, thorough business plan, something a finance broker can help you with.
Advantages

• Familiarity.
• Easy access: banks are ubiquitous on the high street.
• You are not sacrificing a share of your business.
• Flexibility: you can ease cash flow burdens at the outset by arranging a loan where your first few payments are smaller than later payments.
• Long established and regulated rigorously by the Financial Services Authority (FSA).
• Debt finance offered by banks is much more accessible to small businesses unlikely to grow rapidly, or at all – the majority of small businesses – than share capital offered by venture capital funds and business angels.
• Customer service – one-to-one advice and assistance at your bank from a dedicated relationship manager. Most banks also offer telephone banking until late in the evening, sometimes even 24-hours a day.
• Internet banking means you can keep up to date with your accounts 24 hours a day.

Disadvantages

• You might require additional guarantees, which might affect your credit rating.
• You might have to provide security, and even if you don’t then this means the interest rate will be higher.
• People that need the money the most are often turned down.
• You have to pay back interest as well as the money you originally borrow.

Appropriate for
Small business buyers who do not expect their business to grow rapidly.