Innovation Finance may be available also from a more conventional source, Banks. Banks, as a general rule, are unlikely to invest in the equity of a new company. They can, however, provide loans and they can also provide the conventional banking services: cheque and deposit accounts, overdraft facilities and so on. Apart from these, Banks may offer world-wide financial transactioning, insurance and risk management provide information brokerage and consultancy services. These services are of considerable importance to the smooth financial running of the company.
It is not a good idea to try to finance a company by means of overdraft facilities alone. The interest rate will be high and the Bank is likely to call in the loan at very short notice if it should become dissatisfied with the progress of the business. Bank loans should only be considered by smaller companies if the amount required is relatively small or if it is needed for the very short term. Ideally, too, this method of financing should not be used unless the borrower has a positive cash flow with which to offset the interest payments and the repayment of the principal.
The choice of Debt (loan) or Equity Financing depends on a number of factors. Debt Finance has advantages and disadvantages and the choice comes down to the specific circumstances of each case and the attitude of the entrepreneurs themselves.
| Bank and Debt Finance entails: |
But: |
| No loss or reduction of ownership of the Company. |
Security is mostly required, up to the value of the loan itself. |
| Loans may be negotiated for the short or the long term, according to the Company's needs. |
Interest will be payable, regardless of results |
An added problem is that because smaller companies, especially technology-based ones, are seen as risky ventures, Banks may be reluctant to offer loans. Recognising this as a legitimate problem, a number of public authorities have put in place Guarantee Schemes to encourage Banks to make loans to what they might otherwise consider undesirable customers. Borrowers may pay a premium for this service but it is usually a small amount in relation to the loan itself.
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