Many small proprietary companies still operate with share capital of £100 or less and minimal reserves.  Bankers and venture capitalists call these "lifestyle" companies.  The directors and shareholders, who are often common, withdraw profits each year as bonuses or dividends.  With the recession of the early Nineties, these were the companies that lacked the underlying capital to adjust their financing methods and ended up going to banks, borrowing at rates of 15 per cent or more.  With squeezed profit margins, they were, in many cases, unprofitable. 

When profits and business are growing, it is probably fair to say that, at modest levels of growth, bank lending and other forms of loans are the cheapest forms of financing.  There comes a point, however, in the growth cycle where the gearing ratio of internal capital to external loans reaches the point of saturation and where no further loan can be justified.  The next move is to put in further capital.  With the Enterprise Initiative Scheme giving tax breaks for new capital, the climate of financing equity injections has rarely been healthier.  So why do companies still have problems? 

Many business financing problems could be eased by looking more closely at the business and considering the different ways in which sources of finance can mesh together.  It is often possible to make a better case by stratifying the different sources of finance with their different risk and reward factors, interest and return costs and payback and cashflow implications.  Retaining flexibility for future possible options is also clearly advantageous.  Some of the options would include: 

Capital versus loan: 

Is the business undercapitalised?  Would an interest-free, non-capital repayable injection of capital enable the business to borrow some additional finance releasing further growth?  Consider the effect on existing shareholders' capital of new capital being brought in, often referred to as equity dilution, and include preference shares as well as equity shares in your calculations. 

Banks: 

Overdrafts are often the cheapest form of bank borrowing, but consider also medium-term loans, fixed-rate loans or flexible-rate loans with "caps" and "collars", and also trade finance instruments, such as bills of exchange and letters of credit.  A most useful adjunct to bank borrowing these days is the Small Firms' Loan Guarantee Scheme, which makes it possible, in certain instances, to receive bank facilities where there is inadequate security.  The bank receives a Dti guarantee of repayment in the event of default for between 70 per cent and 85 per cent of the amount of the loan. 

Venture capital: 

For small or medium-sized enterprises (SMEs), venture capital in its present form is probably unavoidable, mainly because of the difficulty of them obtaining an exit.  It can also be expensive with overall return requirements commonly exceeding 25 per cent p.a..  Venturers rarely offer only equity and a mixed package of equity, preference shares and bank finance is usual. 

Business angels: 

More and more people with relevant skills are prepared to invest in businesses.  Typically, the amount of the investment will be in the region of £20,000 to £50,000, although there are some individuals prepared to invest up to £250,000.  There are a number of organisations with databases of such people.  Apart from the capital injection, businesses often benefit from the external new skills which the individual brings. 

Asset finance: 

The most popular methods of financing plant and equipment are still hire purchase and leasing.  The asset finance groups have developed a number of ways to assist.  Rates of borrowing are usually competitive, but it pays to shop around. 

Factoring: 

Sales factoring and confidential invoice discounting have had their supporters and detractors over the years.  If you understand the mechanism of the operation, you will not be so confused when the finance suddenly appears to dry up.  The difference between the two is a legal one of principal and agency respectively, but the specialist factoring companies are highly professional and most competitive these days.  You may even find your bank manager recommending factoring. 

Sale and leaseback: 

For companies with property assets, there are still opportunities for releasing capital at modest returns by selling on to financial institutions.  You will pay the institution a rent as a yield, typically 8-10 per cent.  The stronger your business, the better the covenant will be - making it correspondingly easier to do a deal. 

Mergers and takeovers: 

Slow growing businesses with capital can sometimes be taken over by fast growing businesses without capital by a variety of means, enabling the combined group to release faster growth than each could obtain separately.  There are often managerial questions and also problems of integration, but more companies now see this form of acquisition expansion as a way forward. 

Exports: 

Export Credit Guarantees are still one of the more sensible mechanisms for reducing risk exposure and can be utilised along with letters of credit, etc.  Deciding how to protect your currency risk is probably one of the most important areas to think about. 

Flotation: 

Companies with a certain critical mass can consider going public, either through a public offer of shares on the London main market, the Alternative Investment Market or the unregulated market, Ofex.  Critics of flotation cite the cost of lawyers and accountants and the burden of having outside shareholders.  However at the end of the day, a number of entrepreneurs have made very large profits and released wealth that would otherwise have been tied up. 

Grants: 

Many businesses would benefit by being able to navigate the grant maze.  There are hundreds of grants for UK businesses and you may well find one or two for which your company is eligible.  There are several sources of grant information, but you will probably hit a brick wall if you approach the Dti direct. 

Debtors: 

The most frequent reason for poor cashflow these days is poor debtor control.   Invoicing at the wrong time of the month and late invoicing are also frequent culprits.  Try to time your invoicing cycle with customers' payment cycles.  Invoicing one day earlier might put you onto a payment cycle up to 30 days earlier. 

Stock and inventory: 

Have you got too much stock and inventory?  Are you using information management systems and the "Just in Time" philosophy to reduce your working capital?  De-stocking is a good idea in practice, but needs very careful management. 

Consider also remortgages, bridging finance and pension fund loanbacks.  If you are seeking additional finance for your business, you will probably need to prepare a funding proposal.  You will need to include historical information, such as audited accounts, and a narrative covering your company, products and markets. 

The reasons why you are seeking further finance should be explained.  You will also need to include projections showing profit and loss accounts, balance sheets and cashflows for at least 12 months and perhaps up to three years ahead. 

Common reasons why funding proposals are rejected include:  misunderstanding the mechanism under which the lender operates, poor security, and, strangely enough, inadequate understanding of marketing and competitors.To have the best chance of being successful in your search for sources of finance, it also pays to take independent, objective advice.