Alternatives to bank borrowing

While half of all businesses use loans, overdrafts and other types of bank borrowing , many operate successfully with no borrowing facilities at all. Many businesses, including start-ups, finance themselves using savings, redundancy payments, loans from family and friends or remortgaging. One in three businesses use internally generated profits to fund further investment.

Source: Mintel

Equity finance

Generally, external financing for businesses falls into two broad categories, debt and equity.

Equity finance is capital invested in a business for the medium to long-term in return for a share of the ownership in - and sometimes an element of control of - the business. Unlike lenders, equity finance investors own a part of your business. Their return comes from dividend payments and ultimately the sale of their shares, and so depends on the growth and profitability of the business.

Because equity investors share the risks your business faces, equity finance is often referred to as risk capital. Equity investors need to be persuaded that they can obtain the returns they require, and are unlikely to make investments without taking a significant share of the company's equity.

Equity finance is likely to be most suitable for new ventures, investment in new technology and businesses that will take many years to achieve a positive cash flow.

Business angels are wealthy individuals or businesses looking for interesting projects to invest in. Generally, for a business angel to be interested in your proposition, your business should have the potential to grow exponentially over the next three to five years. Angel investors look for a good return on their initial investment after a three- to seven-year holding period. The average return on angel investments in the UK is 22% after four years.

Venture capital firms are professional investors, providing medium to long-term financing for promising businesses. Whereas angel investors generally invest up to around £750,000, venture capital firms tend to invest larger sums and may prefer to invest in established businesses rather than new start-ups.

The Business Finance Taskforce (an initiative formed by HSBC, Barclays, RBS, Lloyds Group and Santander) is launching a new Business Growth Fund to invest in companies with a turnover between £10million and £100million needing funding of between £2million and £10million. The fund will work to support established companies with strong growth potential.

Government schemes and grants

A wide range of government and other grants is available depending on the type and location of the business. They are available from the government, local authorities and the EU. The EU's grant activities are limited to public sector funding.

Businesses which are viable but lack security for borrowing may qualify for a government guarantee which provides the required security under the Enterprise Finance Guarantee Scheme .

For international trade working capital and bond support facilities for businesses which again are viable but lack security, government guarantee schemes may be appropriate through the:

• Export Enterprise Finance Guarantee
• Export Credit Guarantee Department Bond Support Scheme or Export Working Capital Scheme .

Areas where grants proliferate include research & development (R&D), employment and training, and environmental schemes. You can search for potential sources of help with starting up, running or developing your business using Business Link's Business support finder. Support may be available in a number of forms, including financial assistance and free or subsidised advice services.

Community Development Finance Agency (CDFA) represents community development finance institutions (CDFIs) which provide loans and support to those who find it difficult to access finance from the commercial banks. Finance is typically offered to smaller businesses, with many specialising in 'micro businesses' with less than 10 employees.

Working capital

Rather than looking for additional funding, you may be able to significantly reduce your financing needs through tighter control of working capital. Avenues to consider include:

• Looking at how long you give your customers to pay. Perhaps you could ask them to pay by credit card instead?
• Negotiating better credit terms from your suppliers
• Reducing stock holding to free up cash.

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