Very often, when a business needs to raise some finance, it automatically turns to the bank or other lender and seeks to set up a loan or an overdraft without having explored any of the other funding options...

Loans and overdrafts can be ideal for certain types of funding but are wholly unsuitable, and indeed unnecessary, for others. But depending on what you want to use the money for - and how much you need to raise - there may be cheaper or alternative ways of getting the funding you need.

"Many businesses are pretty nervous about raising finance and often just do what their bank managers tell them to," says Steve Janes, partner at law firm Matthew Arnold & Baldwin. "There are opportunities to be more adventurous and imaginative in the way they get their funding and businesses should be exploring these."

So before you even think of pleading with the bank manager to lend you cash, here are the five things you should do first:

Borrow from your suppliers and stop lending to your creditors
Look at the lines of the credit you give and you receive. You may be able to negotiate longer payment terms with your suppliers - especially if you have a good relationship with them.

Analyse the payment terms you give your customers. Do you really need to offer all of them the same terms? It may pay to be more generous with your bigger customers than with your smaller ones. And whatever the payment terms you offer, have proper procedures and systems in place to make sure you collect monies owed to you on time. Don't forget that when you give someone credit you are effectively lending them your money for free - something few other commercial organisations are prepared to do.

Work out how long you will need the money for
From mortgages to overdrafts, credit cards to venture capital, there are many different ways of raising cash. Each one has its own pros and cons but, more importantly, each one is suitable for different types of investment.

"If a firm's cashflow is healthy, they should consider factoring or invoice discounting to raise finance," Janes points out. "If they are buying plant they should consider hire purchase. Businesses need to move into the 21st century and forget the stigma that used to be attached to some of these methods of financing in the past."

Alternatively, short-term funding methods such as an overdraft or credit card are fine for every-day expenditure that can soon be swiftly paid off. Leave those debts too long, however, and the interest payments soon mount up.

Work out what you need the money for (and how much)

Borrowing too much - or too little - money can prove to be expensive as you'll either have to pay interest on cash you don't need or go back for a top-up loan.

Carefully and realistically think about how much cash you actually need to fund, whatever it is you are trying to do.

Also think about what you want the money for. If it is to buy equipment, for example, many companies offer leasing, renting or hire purchase schemes that mean you don't have to pay out a huge sum upfront. Some manufacturers of industrial equipment even allow you a payment holiday until the machinery they are selling you is fully operational.

Don't ignore grants

There are numerous grants targeting small businesses. Sometimes they offer just cash, sometimes the grant comes as part of a package that involves additional business support such as advice, training, mentoring etc.

It not only pays to be aware of all the grant schemes that you can apply to - and you can get help with this from your local business support organisation such as Business Links or Enterprise Trusts.

Also use your money smartly. For example, take a business which operates in the Cheetham Hill area of Manchester and so qualifies for European funding for regeneration. If it were planning to relocate, it would need to raise money to redecorate the new premises and may look to its bank for a loan. If, however, it used the money it had set aside to cover other expenses (such as legal costs, rent deposit and insurance costs involved in moving) to pay for the redecoration, it would qualify for a grant to cover the other expenses.

Plan, plan and plan again

The average owner/manager of a small business is so busy with his every-day business that it is easy to leave the finance side to look after itself. As long as the bills get paid and the business stays afloat - just - then what does it matter how its funding is structured.

This is a mistake. A thriving and growing business is underpinned by well-structured funding and finance. You should take time out regularly to review all aspects of your funding and look at everything from how you manage your credit to how much working capital you have at any given time. Drawing up a formal business plan - even if no one's actually asked you to produce one - will help you do this.

Also think about soft loans. These are loans that due to government (or European, or local government) backing, are offered at preferential terms to standard bank borrowing - check with your local Business Link or Enterprise Agency for further details.

And look to the future - if you plan for short, medium and long-term funding requirements now, rather than waiting until you reach crisis-point, you will be better placed to find the funding you need.

Debt financing options

There are many sources of funding for small businesses - factoring, trade finance and loans to name but a few - and each has its own upsides and downsides. Long-term borrowing should not be done using an overdraft, for example, and using an invoice discounting service might prove cheaper than borrowing money to cover credit to customers.