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Finance Providers – Advantages and Disadvantages

June 18th, 2008 by admin

Here are the advantages and disadvantages of the typical finance providers. This guide will help you to decide which options will suit you best when preparing to buy a business.
There are three types of finance for business buyers to choose from: loans, share capital and grants.

What follows is a summary of the core types of finance providers that business buyers use.

Banks – appropriate for small business buyers who do not expect their business to grow quickly.

Banks are cautious in their lending so you need to have prepared a convincing and thorough business plan. A finance broker can help you with this.

* Familiarity and easy access.
* Flexibility: you can personalise a loan where your first few payments are smaller than later payments.
* You won’t have to give up a share of your business.
* Long established and regulated rigorously by the Financial Services Authority (FSA).
* Debt finance provided by banks is much more accessible to small businesses unlikely to grow rapidly, or at all.
* Internet banking means you can keep an eye on your accounts 24 hours a day.
* Customer service – one-to-one advice and assistance at your bank from a dedicated relationship manager. Most banks also offer telephone banking, sometimes even 24-hours a day.

* You may need additional guarantees, which can affect your credit rating.
* People that need the money the most are often turned down.
* You will owe the bank interest as well as the money you originally borrow.

Government loan – appropriate for business buyers with no assets

The Government set up the Small Firms Loan Guarantee Scheme, which is administrated by the Small Business Service (SBS), in order to assist entrepreneurs with no assets to use as security for a loan. The loan can be repaid over a period of between two and 10 years.

Advantage – Perfect for when you don’t have any assets to use as security.

Disadvantage – There is an additional fee of 2%, which is to be paid yearly to the Government.

Venture Capital Funds – appropriate for business ventures declined by banks due to high degree of risk

Venture capital funds (VCs) are generous if they think they will get big returns in a short space of time. They only offer share capital; so offer finance in return for a share in your business.

Advantages – A source of large amounts of capital.
No repayments to consider.

Disadvantages – Required to sacrifice a large part of your company.
Will not be viable for the majority of small and medium businesses.

Business Angels – appropriate for new business buyers with few contacts that are prepared to give back high returns.

Business angels, who are wealthy individuals, also expect high returns and will take on high levels of risk. Unlike VCs, they invest at levels, between £10k and £250k that are aligned with small businesses’ needs.

They are likely to have experience in running businesses and good local knowledge because they usually focus their investment in a particular region. Therefore they are good candidates for great mentors for an inexperienced entrepreneur with few contacts.

* Happy to invest levels of capital suitable for small businesses.
* You can often secure investment relatively quickly.
* Can offer advise due to their first-hand experience of running a business.
* Often have good local knowledge.

* Expect high levels of return on their investment, so not suitable for businesses expecting low levels of growth.
* Infrequent investors.

I will post more summaries of finance providers next week, as there are quite a few!

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