Raising Money

What options do you have when it comes to raising money?

Once you've identified a financial need the temptation is to wade in and start looking for loans, grants and awards. But the first questions any backer - whether they are a bank, friend or grant provider - will ask are, "How much do you need, what do you want it for and how will I get it back?" Even the slightest hint of vagueness will immediately put your potential backer off - or at the very least will make sure they look extra hard at your business proposal.

Thinking through your finances, as described in Basic Financial Planning is the place to begin. Before you start asking for additional money, the backer wants to know that you have a firm grip on your current finances and, for new starts-ups or new expansion projects, that you have thoroughly thought through not just the extra capital you need to make it happen, but the implication of this on your day to day cash flow. See Basic Financial Planning for more information.

The business plan

If you groan, however inwardly, at the words 'business plan' then think again. You do not need a long, complicated, flowery or high powered document. Instead you need a clear, concise report that shows:

what your business does
why you're good at it and how you market it
what the potential is (ie how much money you could make)
what extra finance you need to make it work
what you're going to do with it
and how you'll pay it back (with interest!)

What's more, a good business plan is a tool for you. It's so easy to get sucked in by the day to day running of the business and not step back to take another look at how you might do things better. Writing a plan forces you to sit down and think through areas like financial planning, staffing, marketing and customer service. Once you give yourself the time, you can generate some excellent ideas and really bring a bit of focus to your business management. And the act of writing them down helps you organise your thoughts into a coherent plan.

See our Business Plans pages for more on this.

Sources of money

Whether you're starting up, expanding or just providing your business with a safety net there are three main ways to raise money:

borrowing money through secured and unsecured loans (including from family and friends)
grants and awards that you don't have to pay back
private investors investing cash in return for a share in your business

Borrowing from friends, family and yourself!

For small businesses often the first place to look for additional finance is at home - with friends and family. Have you got existing savings you could use? Or assets you could sell? Or equity in your house that you could release by remortgaging? Is a member of your family or a friend willing to lend you money?

Although the old adage goes, "Never invest your own money," saddling yourself with a loan - and the interest payments that must be met every month - may be the millstone that stops your business from successfully getting underway in the first place.

However, don't think of using your own money or borrowing from friends and relatives as the easy option - one that doesn't require any business or financial planning. If anything it requires even more thought. Make sure you've carefully researched, costed and planned your project - if it goes wrong not only could you lose your own savings, and maybe even your home, but you could also financially damage the people you care about.

Banks, building societies and lending companies

Banks are the main source of additional finance for most small businesses. Once you've carefully analysed your needs and begun to think about your business plan, have an informal chat with your bank manager. Sketch out your ideas and listen to their initial feedback. Take along your draft business plan, or, if you haven't got that far, ask them for advice about drawing up a business plan. Many banks have specialist small business advisors - banks make a lot of money from small businesses, so they have a vested interest in supporting them. At the same time, they also need to make sure they are lending their investors' money wisely - so they tend to be quite rigorous about testing your financial projections and business planning theories. As a result, they can be a very good place to test run your pitch - even if you actually intend to raise money from a different source!

You should also shop around. A good relationship with your bank is a very valuable thing, so don't consider switching banks lightly. However, because small business is big business for banks, you may find a better offer, rate or terms elsewhere. If you do, talk to your own bank first, they may find they have some flexibility in their own offering.

On the other hand, if your bank doesn't have a specialist small business advisor, or you feel you aren't getting the help and feedback you need, then consider switching. To view all the different business accounts on offer by the major banks and building societies, and to compare their benefits and charges, visit the special pages on the Money Facts website: http://bba.moneyfacts.co.uk.

Loans from banks, buildings societies and lending companies take the form of unsecured loans and secured loans. Secured loans - where you have to put an asset, usually property such as your home or a business premises you own, as collateral - have a lower interest rate. Check the Simply Business website to compare loans from major lenders: http://www.simplybusiness.co.uk/finance/business-loans.

Finally, don't forget that loans aren't the only option from a bank. An overdraft or flexible current account may be all you need to tide you through tight cash flow problems. If there is usually a gap between raising the invoice to the customer and getting paid (not that common amongst tourism businesses) then consider factoring. Effectively with factoring you sell your invoices to a factory company, who pay you slightly less than the face value and then collect the full debt themselves from your customers. They also take over the sales ledger - so you don't have the administrative hassle - and chase bad debts, which are no longer your responsibility. Try this link http://www.teamtechnology.co.uk/what-is-factoring.html for more information and to access factoring quotes.

Preferential and subsidised loans

There are a significant number of government, European or privately backed schemes that provide loans at subsidised rates or that provide a guarantee for businesses that don't have security and would otherwise find it difficult to raise finance in the normal way. Visit Business Link's grant, award and loan finder pages to search for these.

Private investors, venture capital and business angels

If you need to raise a larger sum of money, or you are hoping to get some added value, such as hands on help, specialist advice or management support, then consider private investment. Unlike banks, private investors aren't so interested in security, they are more interested in how well they think you are going to run your business and what the scope for growth is. They will be very interested in your business plan, your (and your staff's) management skills and most of all in how well they think you know your market and how effective you are going to be at tapping into it.

The advantages of private investment are that you don't get saddled with a loan and regular monthly repayments which can be crippling to cash flow in the short term. You also get valuable input and advice from an experienced business investor. The downside is that you will have to give up a portion of your business, and you will also have to have the exit strategy firmly in mind.

Whilst a private investor may not be interested in a regular, interim return on their investment - though they may well welcome dividends - they certainly will be looking for an out. They'll want to know how and when they are likely to see both their money returned and the return on their money. So having a clear idea of how you are going to repay the investor - either by selling the business, or buying them out - is very important.

There are three types of private investor:

an individual you know or come to know who wishes to invest in your company (private investors)
an individual (or sometimes a group of individuals) who you find through an agency or other 3rd party contact who are seeking good investment opportunities (business angels)
Venture Capital companies - organisations with large amounts of finance to invest (typically they are interested in firms that need about £2 million, though smaller companies invest from £50,000 upwards)

To stimulate the availability of equity funding (private investment) the government and Europe have created a number of schemes that will match any funds investors are willing to put up, spreading the risk and increasing the overall private funds available. You cannot access these schemes directly but they have generated a number of privately managed funds, details of which you can discover through Business Link.

To find out about business angels, and to start the search for an angel, visit the British Business Angels Association website.

To find out about venture capital and begin your search for VC funds check here The British Venture Capital Association website: http://www.bvca.co.uk.

Grants

There are two types of additional funding which you should certainly pursue: grants and awards. Grants are money that is 'gifted' to your business for specific purposes and under particular conditions. Usually the funds for the grants are from local authorities, regional development agencies, charities, sector bodies (like the Arts Council or the Learning Skills Council) and central government departments.

Grants are almost always discretionary - this means the body that manages the fund has the final say over who does and doesn't get awarded money. They base their decisions, usually, on the location of the business (or proposed business), the size (how many staff you employ or might employ), how much you need the money in order to proceed, how well thought out and planned your proposal is, how many jobs you might create or safeguard and what the return of your project might be to the local economy.

Usually a grant is not for a fixed amount of money - it is for a percentage of the eligible costs of your project, up to a maximum amount. Not all the costs of your project will be eligible - often only capital costs (the set up costs) are allowable, not ongoing costs like rent, rates, wages, utilities etc.

Sometimes grants are highly specific, for example to cover the costs of modifying your building in order to accommodate staff or customers with disabilities, or for research or the use of new technology.

Check the Toolkit's grant database for up to date information on relevant grants for tourism businesses across the North East and also visit Business Link's grant, award and loan finder pages.

Awards

Awards are very different to grants. They are more akin to prizes awarded through competition. Awards are organised and offered by large companies such as Shell and BP, by charities like The Princes Trust, organisations like the Federation of Small Businesses and Business Link and by local authorities and regional development agencies. Usually there is a theme: "Best Small Business", "Best Female Entrepreneur", "Best Green Business", "Best Customer Service" and so on.

Some Awards have a cash prize, some offer certificates and trophies, others offer just the title and certificate. Whilst not, strictly speaking, a very effective route to funding they are worth a mention. There is the possibility of a cash prize, though you'll have to beat off stiff competition to get it. Just as importantly there is the kudos associated with winning or being shortlisted. It is an independent endorsement of the quality and dynamism of your business. It is great for your marketing, and very useful to add to your business plan documents to impress investors. Participants also report that the rigour of entering a competition is a very good discipline for looking at your overall practices - and shouting about them.