Raising capital

Who lends money and why?

Most loan finance comes from the banks. They lend around £40 billion each year to small businesses, though other finance houses also provide loans. Sometimes loans come in the form of factoring (factors pay out against your invoices, though this is effectively just a loan secured on your sales book). Sometimes, they come in the form of asset finance, though this is effectively a loan secured on your capital assets.

The finance institutions take in deposits and then seek to make a return on this money. The level of interest charged depends on their perception of the risk of lending to your business. In general, small businesses are regarded as being a higher risk, so finance institutions charge a higher rate of interest and look for enough security to cover the loan in the event that you can't meet the repayments. Administration costs can be as high for small loans as they are for larger loans, so arrangement fees are also usually payable.

As with other costs, do what you can to reduce the interest charged. Don't be afraid to negotiate. As you build up a credit record the bank will be better able to assess the risk that you represent, and should be willing to reduce the interest charged, provided you keep up your repayments.

If you have insufficient security, then it may be possible to borrow the money required through the government's Small Firms Loan Guarantee (SFLG) scheme. Go to www.dti.gov.uk/sflg for more information.

In addition to the commercial financial institutions, there are a large number of Community Development Finance Institutions. Many of these are managed by local enterprise agencies, but there are other non-bank loan funds as well. Whilst they'll also be looking for good propositions, and personal commitment, they are often willing to lend on softer terms – possibly a reduced rate of interest, less need for security, and so on. Ask your bank manager or a professional business adviser for a list of organisations.