The Beginner’s Guide to Business Finance: From Loans and Grants to Overdrafts and More

Running a business isn’t easy. You have to deal with everything from accounts and invoices to suppliers, distributors, contractors and consultants. In fact, the modern entrepreneur needs to learn to be a generalist, taking advantage of a wide range of skills while simultaneously outsourcing the things they struggle with.

Of course, not all businessmen are mathematicians, which means that many struggle to get a grip on the tricky subjects of taxation, cash flow and accountancy. That’s why some choose to work with independent financial advisors (IFAs) and other qualified accountants to make the books balance.

These subject matter experts have their place of course, but there’s plenty that you can do under your own steam, too. That’s why we’ve pulled together our beginner’s guide to business finance – to give you the expertise you need without the accompanying price tag.

In this article, we’re going to share some of our top advice on how to finance a growing business, from business overdrafts and asset finance to grants, loans and cash advances. So if you’ve ever worried about financing, you’ve come to the right place. Let’s go.

The Types of Business Financing

Before you go out in search of money, you’ll need to decide which financing options are best suited to your business. This will vary depending upon the size of your business, the type of company that it is, which industry it’s in and even on how long clients take to pay their invoices.

As a general rule, most business financing options fit into one of three primary categories:

Self-Financing

Self-financed businesses are usually launched on a small scale with initial funding that’s provided by the founder. For example, if a graphic designer decides to quit her job and start her own business, she might freelance in the evenings to build up a pot of money so she can finance herself through the first few months of the new venture.

Self-financing works well for smaller companies because less risk is involved – after all, if you’re able to save the money up front before starting a business, you know exactly how much you have and how long it will last. However, if your new business requires a large initial investment or if you’re expecting to go many months without making a profit, self-financing becomes an untenable option. It’s also no use if you’re already in business and need the money ‘right now’.

Besides, let’s face it. You’re not really here to learn about self-financing. You want to learn where the real money is.

Non-Refundable Funding

This catch-all term covers a whole host of funding, from charitable donations for non-profit initiatives through to grants from specialist bodies and cash that you’re given by friends and family members. Non-refundable funding doesn’t need to be returned, as its name suggests, which gives businesses a little more freedom with what they do with it. Non-refundable funding is typically more difficult to get, and it’s often only available under a specific set of circumstances. For example, The Prince’s Trust offers development awards of up to £500, but only to people between the ages of 14-25. As a general rule, non-refundable funding should never be used in isolation. Instead, it’s better to couple any grants or gifts that you receive with either self-financed capital or with more traditional, commercial funding such as a bank loan.

Commercial Funding

Commercial funding is what people usually think of, especially once they’ve been in business for a while and have some physical collateral that they can use to secure funding. Here, we’re talking about money that you have to pay back, such as short-term and long-term loans, credit cards and overdrafts.

This category also includes investments and venture capital, which usually come with strings attached. You don’t have to pay the money back for the funding to be commercial – offering up shares to investors or doing work for free will also count. The basis of all commercial funding is a transaction – if you need to provide something in return for the money, it’s commercial.

Self-funding is like saving up your pocket money. Non-refundable funding is like receiving a donation. Commercial funding is like being paid in advance for a job that you haven’t done yet. Make sure that you meet the terms of any agreements that you enter into or you could be forced to return the money. You could even face bankruptcy or lose any collateral, such as your car or your house.

The Beginner’s Guide to Business Finance

Now that you know about the different types of funding, it’s time to take a look at some of the options. Remember that these don’t have to be mutually exclusive, and many financial experts will recommend pursuing multiple avenues at a time to get the maximum amount of funding available.

Before you start, the first thing you’ll want to do is to collect as much operational information as you can. Analyse projected incomes and expenditures to determine how much money you need, and make sure that your business plan is up-to-date so that you can share it with potential investors if they want to see it. Many companies will even create a presentation that they can deliver to potential investors.

Don’t skip the last step. You need to crunch the numbers so that you can get a realistic idea of how much funding you need to secure. You can’t just ask for “as much as possible.” Figure out the minimum amount that you’ll need and then ask for that. Don’t ask for more just because you can.

The final figure will vary substantially depending upon how established your business is. New companies need start-up capital to cover initial costs while more established companies typically need some extra operating capital to tide them over or enough cash to cover the acquisition of a new company. That’s why it’s so important to do the maths and figure out exactly how much you need.

Once you’ve figured that out, you can start to look around for financing. Here are just a few of the different options that are available to you.