Potential sources of equity for your business fall into two broad camps.Since the characteristics of the informal sources differ significantly from those of each of the formal sources, these are looked at separately below.
Informal Sources
You
The first informal source of finance for your business is of course you, yourself.
You can invest your own cash, or cash that you have raised by borrowing against your other assets (for example by raising a mortgage against your house) into the business.
The advantage of this approach is that if you are providing all of the equity funding, you will retain full control and ownership of your business.
The disadvantages, however, can be that you may find:
- you may not have sufficient resources to fund the business properly to the level required; and that
- your personal assets (and personal financial health) are now mortgaged to the success of the business.
Nevertheless, for many new businesses, raising your own money to go into the business may be the only approach available and this will either involve:
- using your savings;
- selling off assets to raise cash;
- raising personal loans or borrowing on credit cards; or
- if you’re a homeowner, borrowing against the equity in your property.
Personal Loans
As many readers will be aware either from the frequent adverts in the press or indeed from the junk mail that pours through your letterbox, most people who own a home and who have a reasonable credit history will be able to obtain an unsecured loan
of up to £25,000 (which is a limit imposed under consumer credit legislation) over say ten to 15 years. As unsecured loans these tend to be expensive when compared with loans secured against your property such as a mortgage or second charge. However, they do tend to be quick to organise and can provide a valuable resource for business start-ups.
Credit Cards
Similarly, most people who have a reasonable credit rating will also receive a large number of offers of credit cards. As is well known, interest rates on credit cards are extremely high in comparison with most other forms of borrowing. However, some small businesses are taking advantage of the competition in this marketplace whereby many of the offers of new cards have an introductory period of up to six months at 0% interest, including on balance transfers.
For those who are sufficiently organised and brave, these can be used to provide a source of finance at 0% where a personal credit card is used to meet business expenditure. The minimum payments are then made on a regular basis and the balance is transferred to a new card with another 0% balance transfer rate at the end of each introductory period.
The risk is obviously that at some point you will need to either repay this borrowing to clear the card, or you may end up with funds borrowed at a very high rate, so it’s not a strategy that I would recommend.
Borrowing Against Personal Property
Most individuals’ major store of personal capital is the equity in
their house. Therefore when looking to raise business capital, borrowing against this is usually the only realistic option.
It is also true that cash raised against the security of residential property can be amongst the cheapest sources of financing available as it is raised at domestic mortgage rates. If you simply want to arrange a top-up loan by borrowing against your house without disturbing your existing mortgage using what is called a second charge (because the lender will take a second charge on the property behind your mortgage lender) there are a number of websites which will allow you to apply for such money direct (try
www.creativehomeloan.co.uk ).
If you need to seek a full remortgage, this is now an area that is highly regulated and you will need to take professional advice from an independent financial adviser. Contact Creative Business Finance (see Useful Contacts p
429) for referral to one of the appropriately qualified advisers with which they work.
In any event, you must always remember that, as it says in the small print, your home is at risk if you do not keep up the payments on a mortgage or other loan secured on it.
There are obviously an enormous number of mortgage products on the market which change all the time. It is worth noting, however, three types of product in particular which may be of assistance in buying a business.