Banks are often a first stop for firms who need money but there are other options, writes Colm Ward

A good idea and lots of hard work are essential ingredients for any successful business. But without a third element - money - very few would ever get off the ground.

Whether the aim is to start a new business or to grow an existing one, chances are that financial investment will be needed at some point. By and large, the successful business people are those who have a talent for raising money when it is needed.

How that money is raised depends entirely on the business in question and on the amount needed. Some raid their own bank accounts, tap family and friends for loans, or re-mortgage the house while others look for bank loans, bring in new investors or take advantage of grants.

The first stop for many businesses seeking to raise finance is their local bank, building society or credit union. All the main financial institutions now have dedicated business support units which offer advice and expertise as well as financial support to start-up or developing businesses.

Typically the finance available is in the form of loans and overdrafts which the company pays back with interest over a period of time. Unlike some other methods of raising finance, the lender will take no active role in the running of the business and will receive only the agreed repayment amount irrespective of whether the business is successful or not.

"Be very well prepared," is the advice offered to companies seeking finance by Mr Michael Gannon of Bank of Ireland's Enterprise Support Unit. A realistic approach is very important when creating a financial plan. "You can't place too high a premium of planning," he says.

The unit will lend sums ranging from €60,000 to €200,000, with the typical amount being about €150,000. Last year, it provided between €20 million and €25 million to assist start-up and developing businesses, according to Mr Gannon.

An alternative to a loan is to sell a portion of the business to investors.

These investors become equity shareholders in the business in the hope that, as it grows, the value of their share will increase. If the company is profitable, they may receive a portion of the profits - known as a dividend.

Even in times of economic uncertainty, there are always people who are willing to take a risk in the hope of reaping a return on their investment.

The Business Expansion Scheme (BES) is seen by many as an ideal opportunity to invest in a growing business. Introduced in 1984 to encourage investment in Irish companies, the BES offers incentives in the form of tax exemptions to people who invest in new and growing companies. It is limited to businesses that are engaged in certain manufacturing, service, tourism, research and development or plant cultivation activities, in the construction and leasing of advance factories, or in certain music recording activities.

Under the scheme, private investors can invest money - up to €31,750 per annum - in qualifying companies. In exchange they will receive a stake in the company and will also be eligible for tax relief on the amount invested. As with nearly all investments, however, there is some risk attached.

Because most of the companies qualifying for financing under the BES are small, owner-operated concerns, they are more likely to fail than more established businesses. In such a case, the entire investment could be lost.

The best companies to invest in are often "bricks and mortar" type operations whose assets can be clearly seen and who have a good track record, says Mr John Hinchy, taxation director with business advisers Grant Thornton. He advises people not to invest solely for the tax-break but to take into account the quality of the company in which they are investing. "If people are prudent about it, they could still make a good investment." By conducting in-depth examinations of the company seeking finance, advisers like Mr Hinchy are in a good position to determine if it represents a good investment. "We would turn \ away if it was too high-risk or if we didn't have faith in the project," he says.

Typically, the minimum level of funding a business would seek under the scheme is in the region of €300,000.

The BES is not always the best option for companies trying to finance their growth - not least because it is so limited in the business sectors that qualify. One alternative is to seek investment by venture capitalists. These are people - or companies - whose sole activity is to invest money in other businesses with the intention of making a profit as they grows. This is known as taking an equity holding in the company.

A company's suitability for venture capital depends on what stage it is at in its development, says Mr Niall Carroll, managing director with ACT Venture Capital. However, at a minimum, it should have a good business plan, good experience and a clear vision of what it wants to achieve.

Like many venture capital companies, ACT's funds are financed by a number of institutional investors, such as banks and insurance companies. It recently raised €170 million for a new fund which is mainly targeted at technology-based companies in Ireland.

A venture capital company will typically take an active role in the running of the business being financed. In the case of ACT, a representative "almost always" goes on the board of the company with a view to becoming "active, helpful participants on the board", says Mr Carroll.

Venture capital has become steadily more popular as a source of finance for Irish business over the past number of years. According to a report carried out on behalf of the Irish Venture Capital Association, €124 million was invested in 2001. Although this is slightly down on the 2000 figure, it represents a threefold increase on the 1997 figure of €39 million. The importance of the technology sector is reflected in the fact that 77 per cent of funds invested in 2001 were in this sector.

Last year, ACT invested €25 million in new and developing companies and Mr Carroll expects that this will increase slightly in 2003.

As a company grows and develops, an initial public offering (IPO) might become an option as a way of raising finance. This means that shares in the company can be bought and sold on the stock exchange.

When a company goes public, it must publish its accounts every year and the value of the shares will often rise or fall depending on the state of the business.