Loans are generally asset or equity backed, and on rare occasions secured against forecasts. Finding the right loan is first about understanding the needs of the business and the shareholders, what’s the purpose of the loan and how long will it be needed for.
Generating working capital for stocks and overheads is generally achieved through an invoice discounting arrangement. A detailed cashflow forecast is needed before entering into any agreement, especially in businesses with seasonality and extremes in sales volumes. Matching the funder to the business is key as some are more aligned to different sectors. Other considerations are the levels of import or export undertaken and the credit risks, especially if one customer dominates.
Borrowing against assets is another common approach, most often when buying something new or raising cash against assets that are owned by the business.
At the other extreme Equity Financing can be a good way of injecting larger amounts of cash into a business that is growing rapidly or needs development funding not available through other routes. Clearly this means giving the investor shares in the business and they will want a say in how the company is run. This should be taken into consideration as a sector relevant investor will add value beyond the money – think Dragon’s Den without the hype. Smaller businesses may find the route to Equity Financing is through Crowd Funding which generates the investment but with the risk spread over more investors.
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