Accessing funding from traditional and alternative sources

As a small business or start-up, accessing finance can be a daunting process - especially if you do not have the funds available to seek expert business advice or guidance in the first instance. Joanna Drinkwater, managing director of Grant McKnight Chartered Accountants, Tax Consultants and Business Advisors, shares top tips for accessing funding.

When seeking funding, first and foremost it is important to gain an understanding about the variety of finance options available out there. The right option for your business depends on how much money you require, what your business is trying to achieve and whether you are prepared to give up a share in your business.

Wherever you are seeking to access funding, there are some essential key points which need to be considered and presented to potential funders to maximise your chance of a successful application.

Available funding options

Funding usually falls into three categories: equity, debt, and grants.

Essentially, equity means to get investment - so businesses would usually sell shares to raise money. Equity finance includes seed or angel finance, venture capital, private equity, IPO/public offering, equity crowdfunding and expansion capital. Investors, like the business owner, are invested in the company's success, so utilising their strategic guidance and expertise can help your business achieve its growth ambitions in a sustainable, considered way.

Debt finance, on the other hand, means to get a loan - so businesses will borrow money from a lender and repay it back with interest. Lenders usually want to see a track record as part of their credit assessment criteria to gain confidence that your business can repay the loan back over the agreed term period. Options include a start-up loan, overdraft or business loan, asset-based finance, leasing or hire purchase, invoice finance or peer-to-peer lending.

Grant funding is non-repayable and is usually awarded by governments or organisations to help businesses achieve certain goals, such as investment in certain assets or activities.

You can combine different finance types to help reduce the cost of capital. For example, as debt funding can be cheaper than equity, businesses can seek more than one type of funding to reduce the overall finance costs.

Business plan

Preparing a solid business plan is the key to securing funding.

All lenders or investors will require a viable business plan documenting your business goals and objectives, and how you plan to achieve them over a set time period.

This essentially will paint the picture to the funder about how you will generate money and make your business sustainable.

Funding requirements

What do you require funding for? This could be for a variety of reasons including improving cashflow, investing in machinery or equipment, refinancing an existing loan, vehicle finance or simply seeking investment to start up, grow or scale up.

Specifying and outlining your funding requirements will help you quantify how much finance you require.

Financial forecast

Producing a financial forecast is essential as funders will need to understand in detail how you intend to utilise the funds over a specified timeline.

Financial forecasts will usually include a three-way cash flow, balance sheet and profit and loss forecast over three to five years.

It is imperative to include loan or debt repayments to show that you can meet repayments under different trading conditions.

Financial performance

If your business has been trading previously then your financial history will be required to help lead to a lending decision.

Funders will usually ask for your last two years of filed accounts, and your most recent management accounts to prove trading history.

Bank statements will need to submitted as evidence to back up your financial performance.

If you use cloud accounting software, then funders may be able to access your financial history at the touch of a button by connecting their software with your platform provider.

Owner's experience and commitment

Funders will want to understand the business owner's previous business experience, and how much of your existing money is committed to the business.

Any relevant qualifications and job history will help prove your track record of success.

A net asset statement from the owners will outline your assets, liabilities and effectively your net worth.

Security

In many instances, funders will ask for security against funds, so you will need to consider which assets you can use for this purpose.

Providing personal guarantees, property or machinery as security often increases your choice of lenders.

External advice

There are many funding options available and there is free help and advice out there to guide you through preparing a funding application.

British Business Bank is an excellent place to start for free advice about finance options.

The government supports many local initiatives which help smaller businesses grow and access finance. To find out what is available in your area, contact your nearest Local Enterprise partnership through the LEP network.

Businesses are offered a free advice session with an ICAEW Chartered Accountant. Visit icaew.com/bas to find the nearest office participating in the scheme.