Raising finance for your business should I not be difficult provided you either have an existing profitable business or you have an idea for a new business that is feasible. Both of these aspects are important. If a lender is to finance your business they must be sure that you can meet the repayments. They are in business to lend money and make a profit. Raising the right type of finance for your business is also important. There is little point in borrowing money on a short-term basis if you can only repay it over the long term. This is a common mistake that small businesses make.

They utilise short-term finance, for example a bank overdraft, to finance long-term expenditure such as the purchase of a new vehicle. This then leads to a reduction in short-term finance for working capital which could, in some circumstances, lead to business failure. You must match the type of finance to the type of expenditure.Your bank will probably be your first option to gain finance for your business, but we will also look at other alternatives in order that you can gain an overall picture of what may be available.

Investing Your Own Money

Before you can even consider raising funds from external sources you must make your own investment. This investment takes two main forms:

• financial
• non-financial.

Financial investment, as the name suggests, is a direct injection of cash into your business. If you are operating as a limited liability company, this could take the form of share capital or director’s loan. If you operate either as a sole trader or partnership, it will be classified as owner’s or partner’s capital.

The decision as to which type of business to operate can be complex. There are advantages and disadvantages to operating as a sole trader or as a partnership, or as a limited liability company. From the outset you need to seek professional advice on this aspect.

Non-financial investment is the introduction of assets that you may already own, such as motor vehicles and tools and equipment. These need to be carefully valued for inclusion in your financial records. If you are introducing assets into your business in this way you are advised to seek the help of an accountant. This will ensure that your assets are correctly valued and that they comply with any Inland Revenue guidelines.

Showing Commitment

Gearing

Gearing is the relationship between your funds in the business, the owner’s capital, and borrowed money or debt. Let us assume that your business has £5,000 capital and you are seeking £7,500 of borrowed funds. Gearing is calculated by dividing one by the other and can be expressed in one of two ways:

• gearing percentage – £7,500 ÷ £5,000 x 100 = 150%
• gearing ratio – £7,500 ÷ £5,000 =1.5:1

This shows that for every £1 of capital there are debts of £1.50. Gearing of more than 100% is considered high. Gearing of less than 100% is considered low. This means that with low gearing the owner is shouldering the majority of the risk. Conversely, with high gearing, the lender is assuming more risk than the owner.

For a small business looking to raise finance, the lender will probably be looking for gearing as close to 100% as possible, although there is no ‘perfect’ gearing ratio and each proposition is considered on its merits.

It will also depend to a certain extent on the type of finance that you require. For short-term finance, for example a bank overdraft, it is likely that gearing of 100%, i.e. matching finance, will be possible. On the other hand, long-term lending may only require a small contribution from you. For example, the purchase of a vehicle may only require a 10% deposit from you, equating to a gearing ratio of 900%.