There are many widely accepted routes of acquiring and achieving the levels of business funding that any business may need. Although the likes of angel investors, venture capitalists (VC) and crowdfunding are all well-utilised routes both in the UK and around the Western World, there are further methods with which to raise the capital needed for business purposes.
These options are commonly used for smaller and medium sized business purposes, where thousands rather than millions of pounds are needed, and range from remortgaging, to utilising friends and family and even mezzanine finance, a hybrid form of mortgage and business finance. Whichever type of finance or funding a business decides to pursue, there are some common considerations that should always be taken into account.
The importance of getting the funding or unlocking some much-needed capital for a business or venture of any nature should never get in the way of these considerations, as the consequences of defaulting can be dire for any individual, business and leader.
Using Mortgages for Business Finance
There are circumstances in which it may be desirable and worthwhile to leverage the value of a property and the equity owned to unlock some capital for your company. It is always recommended to avoid securing any additional credit against yours and your family’s home property, but if for example you own a second property it may be worthwhile.
The most commonly utilised routes for getting business funding in the form of a mortgage are remortgaging an existing mortgage and taking out a second mortgage. Remortgaging with a first charge mortgage will require you to have paid off a share of your mortgage, thus, owning additional equity against which to secure the loan.
When it comes to second mortgages, although they are particularly popular when used as home improvement loans, they can be utilised for business purposes, so long as the lender is satisfied after conducting their due diligence on the borrower and their business (source: Money Savings Advice).
Second mortgages allow the borrower to acquire and then pay off another mortgage, which runs concurrently with their regular first charge mortgage and without the need to consider things like early repayment fees and the remortgage process. These mortgages can for example, under the right circumstances allow the expansion of a small, local business selling goods (Source: Artisanne); enabling it to purchase more goods and larger premises.
The Responsibilities of Debts and Repayments
Any loan or business finance arrangement will encompass varying degrees of both responsibility as well as risk. There is responsibility to use what may be a very large amount of money sensibly and efficiently, yet ambitiously. There will also be the risk that the money or other form of credit provided is repaid in full, usually with interest, as well there usually being other stipulations and terms attached.
It is crucial that any debts and obligations as part of the financial arrangement are fulfilled and repaid. Failure to repay debts or honour contractual arrangements will lead to problems obtaining future credit for your business which is particularly problematic for startups and small and medium sized enterprises (SMEs) who are more likely to need future credit as well as loans and finance.
Failure to repay debts will mean any or all of:
- Company assets seized
- Court proceedings initiated
- Credit ratings severely damaged and impaired
- Reputational damage for your business for the future
- Decreased ability to achieve investment in the future
Shares and Equity
Understandably, various forms of funding may require the borrowing business in question to have to give up some equity, or ‘shares’ in their business. Understandably, many business owners and directors do not like doing this as it also means giving up a proportional share of control over the business as well as the all-important profits for the business too.
However, and very importantly, if the investor or finance provider receives shares but is bringing large value to the business, giving up business equity is usually very much worthwhile as it will allow the business to grow as it would otherwise have been unable to have done. Investors who take a share of equity bring more than just money to the business. They also bring networks of connections and business contacts as well as experience and a wealth of knowledge that will almost always prove invaluable to the business and its future growth and plans ahead.