Often when you’re looking to start or expand a business there is one major barrier, money. So the question is how do you raise the finance needed to fund your endeavour? With a good deal of research is the general answer, and with the list of popular finance options explained in detail below, we hope to make your journey to gaining finance a bit easier.
Business loans typically allow you to borrow an agreed sum of money and pay it back over a certain period with interest. There are two major types of loans:
- Secured business loans: The borrower of the loan puts up some collateral such as a house, car, or shares against the value of the loan, if repayment fails the asset can become forfeit to the loan provider.
- Unsecured business loans: The borrower of the loan doesn’t put up any collateral, the loan is given on the basis of the borrower’s current situation.
They’re generally seen as a source of finance for the medium to long-term. Typically, loans are advantageous as there are many options available both commercially and government backed. You’re not selling equity in your business like with venture capital and you can shop around for an affordable payment rate and plan. For businesses in the UK there are also some tax benefits on paying back a loan.
If you do take a business loan make sure the payment terms and timeline is realistic for your situation and gives you some room if things don’t go quite to plan. Loans remain the most popular option for businesses starting out and one of the most popular finance options for businesses looking to expand.
If you are applying for a loan, the major requisite is to make sure your finances and accounts are up to date and you have a clear plan to pay it back, of course that depending on the loan provider there can be many other prerequisites e.g. monthly revenue, credit rating, years trading…
Small business grants are typically given by the government, a government body or a charitable outside body and they are finance given to organisations or individuals that meet certain criteria and go through an application and vetting process.
For example, Innovate UK is a government body providing grants for innovation in certain areas of the UK economy. These grants are designed to help support specific businesses and sectors of the economy engaged in a specific type of research and development.
Grants can range in size from £500 to £1,000,000+, with the majority in the UK sitting between £3,000 – £100,000. Grants are a brilliant source of finance for businesses as they don’t have to be paid back but they are very hard to apply for, very competitive and often only available for very specific businesses or those engaged in specific areas of research.
The main consideration on whether you apply for a grant or not, should be the time it will take you to apply compared to the likelihood of getting the grant, with further consideration given to what you could be doing instead of applying to raise finance.
Invoice financing allows companies to borrow money against the value of invoices due from customers, typically you can receive up to 85% of the value straight away and the remaining amount (minus the finance charge) when the invoice is paid by the customer.
Invoice finance can be a great option if you have many corporate or SME customers who have long payment terms or tend to pay as late as possible, it’s a great finance option for plugging holes in cashflow. Your invoice is generally bought as debt is in most cases, it’s common that if the invoice isn’t paid, for you to be shielded from any debt owed.
Although a great option of finance, invoice financing really is only available to companies with a strong track record of generating revenue and getting paid by customers. It’s designed to alleviate the problems that come from 30, 60, 90 or more payment day terms agreed with customers that can cause finance shortfalls.
If you’re looking to gain invoice finance, you’ll need up to date financials and accounts, and you’re your customers will typically need to be fairly large for anyone to finance your invoice.
Crowdfunding has really grown as a source of investment for businesses overall and specific products. You’re basically taking a small amount of investment from a lot of people to equal a much bigger sum. Crowdfunding can be divided into two types:
- Equity based: You give away equity in return for investment funds.
- Rewards based: You give away perks, rewards or thanks for people supporting a specific product or business.
Crowdfunding is generally used by high tech and product based businesses. It’s important to consider that the success of a crowdfunding campaign is generally reliant on your ability to market your proposition. It can be a great source of finance, especially if you’re launching a product, as you’re effectively doing pre-sales to fund development and launch. There is also a good range of crowdfunding platforms to choose from including Kickstarter, Seedrs, Crowdcube and IndieGoGo.
If you’re looking to raise money to start or grow your business, equity based crowdfunding has become a popular way to do it. Be careful though, unless there’s a nominee structure, you may have to report to 1000’s of small shareholders if you raise this way.
Venture capital is a good option for high growth companies looking for serious finance in exchange for equity. Typically, VC money in the UK starts from £500K and goes up to £50 million for a single investment.
VC is a popular way for companies who are in a growth stage to raise, you’ll need a business that is scalable and has a clear traction to date. Also be papered to be seriously audited if a VC is looking to invest in you, so have your books and plans up to date.
Finally, bear in mind you’re taking on a serious equity partner who has experience investing professionally. VCs bring lots of money but also pressure and structure beyond what you have currently, so make sure you’re ready for that.
If you’re looking to raise a small amount of finance to start out, then raising investment from angels is probably the best way to get it. Investments typically range from £10K to £500K, raising from an angel is often much simpler than raising from VC or institutional funds.
With an angel investor you’ll also likely get a mentor and an experienced partner as an investor to support you in starting your business. Try to make sure your partner understands your area as well, experience can be more valuable than money, i.e. a media company should get an investor who has experience in media.
Although the due diligence is much less than with VC investment, you’ll need to make sure your paperwork and finances are up to date and ready for inspection. Often the only way to find an angel investor is through your network, so go out to events and start mixing.
Asset finance is a form of financing for businesses who require capital to purchase high value equipment or machinery, necessary to support the growth of the business. How does it work? An asset finance company agrees to outright purchase an asset (equipment or machinery) that a business needs, the business then agrees to lease the asset for the remainder of its usable life, paying a use fee over time to the finance provider (the provider recoups the upfront cost and interest accrued over this time).
Asset finance differs from more traditional asset-based / secured loans, in that the asset acquired by the financier is typically the security used against the loan (meaning the business does not need to provide another form of security). The business does not however have ownership of the asset during the agreement (unless otherwise agreed under a Finance Lease).
Subscribe for entrepreneurial & small business advice
Subscribe to our newsletter for advice and insights on starting, managing and growing a small business in the UK.
Asset financing is available for between 1 and 7 years and is most suitable for businesses who are making large capital purchases and do not have the required funds to purchase outright and/or would prefer to spread the cost of the asset of its lifetime.