Any small business needs funding to grow. But finding that money and choosing the right type of finance is not a simple task. It depends on a variety of factors including what you are financing, how you want to repay and the aims and objectives of your business.

Before you think about raising finance, check if there is anything you could do to find the funds elsewhere. For example, many businesses could reduce their requirements if they chased the money they are owed by their debtors more effectively.

The finance options available include:

  • Trade credit: Really borrowing from suppliers, this is a convenient way to free up cashflow but should not be relied on for speculative purposes. You will still have to pay back suppliers on time - as well as any VAT that is owed - if you want to keep a good reputation and a secure source of supply
  • Bank overdrafts and loans: An overdraft can you give you the day-to-day flexibility your business needs. However, if your business account remains overdrawn or if you are purchasing larger assets, it is often better done with structured finance. Business loans are usually taken out over a fixed term of anything from six months to 25 years, often with the benefit of a fixed interest rate and the security of a structured repayment programme
  • Family and friends: A clear advantage of this is the flexibility it will give you in your repayments. But if you do go down this route it's essential to put a formal agreement in place
  • Factoring or invoice discounting: raising cash against your invoices can be useful if you find that you are having to spend a lot of time chasing late-payers or if you are planning a fast period of growth. Products vary, but it's not unusual for firms to receive up to 90% of the value of their debt book
  • Leasing/hire purchase: these are simple ways to fund the purchase of capital items whose value depreciates over time. Often arrangements and rental payments can be tailored to the income flows of your business and it can make it easier to upgrade to new models. Several types of arrangement are possible and each one has its own tax advantages
    Before you think about raising finance, check if there is anything you could do to find the funds elsewhere. Many businesses could reduce their requirements if they chased the money they are owed more effectively'
  • Selling shares: This is an effective way of raising extra capital although it does mean giving up total ownership of the business. But investors may also bring valuable management skills to the business. Larger businesses, typically those with a requirement for £1m or more, are more likely to attract formal venture capital
  • Grants: Grants are available from Europe, national government and local authorities and will vary regionally, depending on how you organise your business and the fiscal year in which you apply. However, they can be complex and can take up valuable time, often without results. Professional fees may be incurred and often the timescales between application and be able to use the money can be long

Whatever you are looking for, you will only get the attention of a lender or investor if you are able to provide a robust business plan. If you do experience difficulties or even if you're simply looking for advice, you should speak to your bank or investor immediately. The earlier you highlight any potential issues, the better.

Mike Harding is senior manager at Lloyds TSB. For more information see www.lloydstsb.com

Lloyds TSB Commercial is a trading name of Lloyds TSB Bank plc and Lloyds TSB Scotland plc and serves customers with an annual turnover of up to £15m. Authorised and regulated by the Financial Services Authority and signatories to the Banking Codes