| Mary Erb, from leading corporate law firm Heatons, takes a no-nonsense look at the different types of funding available to businesses, and who you should approach for what. At some time, most businesses - whatever their size - will need extra funds for something. The reasons vary enormously but typically include: - Needing to purchase new machinery or plant
- Overcoming a cashflow problem
- Replacing cars
- Mounting a management buy-out
- Relocating
- Acquiring another business or financing a new development
Whether you need £5,000, £500,000 or £50 million, one simple rule applies: make sure that the source of your finance and the method of repayment are the most appropriate for your requirements.  | | Mary Erb | You could, for instance, discover that a loan is preferable to an overdraft or, indeed, that your bank isn't necessarily the best place to go for the sort of money you need. This is frequently called the 'matching principle'. Just as there are various reasons you might need money, there are also a variety of people and institutions that lend it. Sources could include private investors, friends or relatives. However, most business funding is provided by the finance industry. There are no hard and fast rules that say if you need X you should get your money from Y. Instead, a combination of how much you need, what you need it for and how long you need it, should be assessed before you embark upon any one route. The purpose to which the funds will be put should also dictate which source you approach in the first instance. Ideally, your first port of call for advice should be your accountant who will guide you to the most suitable source by applying his version of the 'matching principle'. TYPES OF FINANCE Structured finance Most banks have specialised managers who will provide finance to support business deals such as MBOs, MBIs, acquisitions and mergers, often taking a position alongside the venture capitalist. If you're contemplating a major deal like this, always seek advice from your lawyer. Mezzanine finance A half-way position between equity capital and debt finance. If there's a gap, mezzanine finance can bridge it but at a higher rate of interest. Overdraft A facility arranged with your bank whereby your current account can go into a deficit position within agreed limits for an agreed period of time. This is probably the best known source of finance for day-to-day working capital. The interest rate will normally vary along with the Bank of England's base rate. Standard Term Loan An arrangement where your bank agrees to provide an agreed sum with a fixed repayment period and interest rate. The funds become available at once but you must stick religiously to the agreed terms of your loan. Fixed Rate Loan Whereas the interest on a Term Loan can vary with changes in the bank rate, a fixed term loan will guarantee that you know exactly what your future repayments will be over the whole period. Leasing This is a method of getting the use of fixed assets like cars, plant, machinery or buildings, without owning them. Ownership continues to rest elsewhere. You contract to pay for use of them at a fixed rate for a fixed period. Invoice Discounting This is the increasingly popular method of raising funds. The monies are lent and secured against invoices raised. The result is a flexible and adaptable form of raising money. This method is designed mainly to provide working capital on an on-going basis, although increasingly it is being used to raise a lump sum at the outset of entering into these types of arrangements. Venture Capital This is a term used for money introduced into a business at the risk of the investor. There are always strings attached, however. Venture capitalists look for some degree of control and very high returns in exchange for taking high risks. It's a specialist job for specialist financiers. Ask your lawyer, banker or accountant for information. Asset finance A highly specialised form of raising funds secured against assets like installed machinery, intellectual property, future royalties or contracted future rental income. So, these are the key types of finance available. Now let's look at who provides what. SOURCES OF FINANCE Banks Banks are the most obvious places to get money. If you already have a good relationship with your bank manager, ask his advice in the first instance. Banks invariably take into account your trading history and want to see well presented business plans, audited accounts and management accounts. They will almost certainly ask for some form of security against your assets. Invoice Discounters (or Factors) Will advance money against the value of your approved, raised invoices. Again, your accountant or bank manager will be able to make introductions. Venture Capitalists Also known as institutional investors - accept higher risks but expect higher returns from their investment. Therefore, they will only consider putting capital into a business that can demonstrate serious growth potential. In return for capital, however, a VC will want an equity stake in the business, a seat on the Board or involvement in the day-to-day running of the business. VCs tend to work closely with banks. How this is split depends on the level of risk involved. Private Investors More romantically called 'business angels'. A private individual looking to invest in a business that is often related to his field of expertise, so he will bring know-how as well as money. These individuals can often be found through local business organisations or through your accountant or lawyer. Local Authorities & Grants Local Authority schemes vary from region to region and your local Business Link will be able to advise you. There are also a vast number of grants available, the main source of these being the DTI. Stock Market Businesses that are seeking substantial capital can go to the public at some point to raise funds through a flotation on AIM, OFEX or the Stock Market. This involves selling off a proportion of your stake in the business. It isn't really worthwhile considering a float unless you want to raise a substantial sum. Whichever source you opt for, there will always be certain constraints. For instance, would you be prepared to sacrifice an element of control of your business if an equity house became involved? And would you be comfortable with putting up some form of collateral or security if your bank made it a condition of the loan? Take professional advice and heed it. Mary Erb advises business in all sectors on deals of all sizes. Recent deal values have ranged from £1million to £320 million. | 
