Types of Finance - Introduction
A brief description of the key features of the main sources of business finance is provided below.
Venture capital is a general term to describe a range of ordinary and preference shares where the
investing institution acquires a share in the business. Venture capital is intended for higher risks
such as start up situations and development capital for more mature investments. Replacement
capital brings in an institution in place of one of the original shareholders of a business who
wishes to realise their personal equity before the other shareholders. There are over 100 different
venture capital funds in the UK and some have geographical or industry preferences. There are
also certain large industrial companies which have funds available to invest in growing
businesses and this 'corporate venturing' is an additional source of equity finance.
Grants and Soft Loans
Government, local authorities, local development agencies and the European Union are the major
sources of grants and soft loans. Grants are normally made to facilitate the purchase of assets and
either the generation of jobs or the training of employees. Soft loans are normally subsidised by a
third party so that the terms of interest and security levels are less than the market rate. There are
over 350 initiatives from the Department of Trade and Industry alone so it is a matter of
identifying which sources will be appropriate in each case.
Invoice Discounting and Invoice Factoring
Finance can be raised against debts due from customers via invoice discounting or invoice
factoring, thus improving cash flow. Debtors are used as the prime security for the lender and the
borrower may obtain up to about 80 per cent of approved debts. In addition, a number of these
sources of finance will now lend against stock and other assets and may be more suitable then
bank lending. Invoice discounting is normally confidential (the customer is not aware that their
payments are essentially insured) whereas factoring extends the simple discounting principle by
also dealing with the administration of the sales ledger and debtor collection.
Hire Purchase and Leasing
Hire purchase agreements and leasing provide finance for the acquisition of specific assets such