 There are many sources of IT business finance available to companies however not all are equally appropriate to all businesses at all times. These different sources of finance carry different obligations, responsibilities and opportunities for profitable business. It is important to understand the differences in order to make an informed choice. Many small businesses unwisely restrict their financial strategy to bank loans as other financing options seem either too complex or too risky. Often, the reverse is in fact true. Whereas a bank does not share the risk of doing business, almost every other finance source will, to a greater or lesser extent, share some of the risks of doing business with the recipient of the funds.
Understanding the differences between lenders, who provide debt and investors who provide equity or share capital, is central to seeking the right funding for your IT business. Funding options available to businesses include:
Bank Finance
Financing through a bank is usually through an overdraft or loan. Any sum, large or small is available and you will have to repay the loan, pay interest on the outstanding balance and put up security to cover the capital. A personal guarantee from the owner is often required.
Hire purchase and leasing
Fixed assets such as vehicles, computers, office equipment, plant and machinery can be bought through hire purchase and leasing companies. These companies provide an amount of money appropriate to the asset being bought. A deposit of up to a quarter of the funding may be required and you then pay the balance off over several months or years, depending on the life of the asset. Your payments will include interest and capital. The security for the loan is the asset itself and it remains the property of the finance company until it is paid off in full.
Invoice factors
Invoice factors will provide finance to cover the period between delivering your products to a customer and receiving payment. They will provide up to 80% of the value of the invoice and can, if you wish, manage the whole process of collection for you. The security taken is the full value of the invoices to customers.
Other sources
Venture capital firms, corporate venturers and business angels (wealthy individuals who back businesses) provide risk capital to IT businesses. Business angels may invest as little as £5,000, but venture capital firms and corporate venturers rarely consider anything less than £50,000. In return for a share of your IT business they will provide cash to help fund growth and development. They will expect to share the rewards, but ask for no security and face the same risks that you do in the event of failure.
Grants
A number of grants are available to promote and sustain growth of local economies and IT businesses. The DTI and various other organisations offer a wide selection of business grants. These are a great source of finance for start-ups and growing businesses.
Many small IT businesses find that the main stumbling block to accessing grants is understanding the conditions and requirements. These vary and are dependant upon the location of the applicant and what sort of grant is being applied for.
If your IT business is location-independent, it may be worth considering deals which the government and local authorities produce to stimulate the development of new business in a particular area. Grants may be available to induce you to locate in an inner city or to one of the poorer regions of the country, or in an area of significant unemployment.
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