An overview of business financing options in the UK

There is a wide range of business financing options that are available in the UK which primarily deals with a combination of debt and equity financing options. For large businesses equity finance is available for companies that have a fairly stable and large sized growth in sales and profitability. The company in raising equity financing is asking investors whether it maybe private or public shareholder funds in raising money for new investment projects or seeking funds to inject fresh and new capital into the business. The company in raising equity finance the costs are higher than raising debt finance. The company upon making adequate profitablity should in theory pay shareholders a dividend for their risk in investing in the company. The equity finance tends to be used for large investment requests and also the accountants, advisors and legal fees associated with the equity finance also adds to the costs of an equity issue.

Debt by comparison is relatively straightforward in that the issue costs of debt are lower, and the tax paid on the interest is reclaimable from the tax authorities. Debt is much cheaper than equity due to this tax shield as a 10% coupon rate paid in practice the cost of the debt is reduced to around 7% after tax. The cost of paying equity holders using the capital asset pricing model tends to be higher than the risk free market rate which if we say is around 5% for government backed treasury bills/bonds, and this is risk free, the risk premium may also be around 5 or 6% per annum and this results in a higher than 10% return demanded from equity shareholders.

The range of debt instruments available for companies include short term medium and long term finance instruments. The preference for raising finance for any company should be using a system where short term capital requirements are funded by short term financing instruments.

In addition to the debt and equity finance that can be raised, other short term finance tools can be used which include sales invoicing, debt factoring, foreign currency swaps. Sales invoicing and debt factoring are similar in that a third party credit control company are placed in charge of collecting the monies outstanding from companies debtors. The factor will only take on this responsibility if the level of business exceeds 500,000 usd or more, and if the companies debtors have good credit history and are likely good paying companies. The factor tend to advance the company around 80% of the total balances and this gives the company a loan of the total receivables and as such provides the company with much needed working capital. The balance is paid off when the factor is paid in full by the companies debtors, and the factor then takes a fixed fee usually 2-4% of the total invoices.

Business angel finance is where a group of wealthy investors provide a fixed sum of investment in the business in exchange for a stated level of equity in the business. The business angels tend to invest in high growth potential companies and tend to be experts in the field of investment in that particular company product market. Contacts and business acumen and other types of angel expertise that can be used as part of the agreement. The risks and the loss of control of some part of the business ownership is where the decision relies so heavily upon the hands of the business owner(s).