Finding the right type of funding

by The Business Magazine article

09-02-2015

The Business Magazine article

Cashflow and funding is the lifeblood of a business. Without the right type of funding at the right time, businesses shrivel and die. So, what funding options are there to secure the cash you need? Here we consider two options:

Debt Funding

Debt funding is about borrowing money which you pay back (normally with interest) and there are many types. They range from the complicated arrangements within intuitional funders to borrowing a few thousand pounds from friends and family.

The set-up of a business or the purchase of a new asset normally involves term funding, which money is lent for a particular period, with repayment either during or at the end of the term.

Businesses that need funding for cash flow often turn to invoice financing. This is useful where a business has a large amount of debts each month from its customers. Essentially, the funder pays a percentage of the amount of each invoice and receives the entirety of the money when the invoice is paid. With all debt funding, the documentation is key. Institutional lenders will often produce rafts of standard documents, which often require a large drink and a darkened room to navigate. However, even small-scale lending from friends and family should be properly documented to ensure that both parties are protected.

Debt funding often also requires security to back it up such as a personal guarantee or a full debenture granting charges over all the assets of the company

Equity Funding

Equity funding differs from debts in that, in the event of the business failing, the funder does not get their money back. This makes equity funding more risky and therefore investors (especially institutional investors) tend to look for higher returns.

For companies, equity funding tends to be through the purchase of shares. For businesses which are not incorporated, the funding is generally a capital injection. The funder then normally becomes a partner in the business (silent or otherwise).

With equity funding it is worth noting that equity funders often want a say in the running of the business. Equity investment needs to be considered very carefully and the documentation carefully drafted to ensure that the business has the flexibility it needs to operate while protecting the investor. The investor’s exit will also need to be considered and planned.

Funding is essential to many businesses, large and small. However, it can be tricky for the unwary so seek the right advice.


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