Whether you’re looking to start or grow your business your going to need some form of funding to get underway. However, figuring what sources of funding are out there and which are available to you as a business owner is a little more tricky than you might first think. Overall there are two primary forms of funding available to small businesses, these are debt and equity both covered here as well as a third area covering different types
This guide will help you to navigate these different sources of funding, discussing the advantages and disadvantages of each funding options and indicating which stage of business its best suited for.
Small business loans
Traditional business loans if you can get them a reasonable rate is also still a good way to raise finance for your venture, particularly if your already generating revenue. Remember any loan is debt finance and will have to be paid back, be careful on the terms you agree to and when possible try to find other forms of finance before you take on any debt.
Small business grants and government grants
The UK government, local authorities and private organisations provide funding and grant opportunities to small businesses across the country who meet certain criteria. These grants are typically for new businesses or existing businesses who are supporting economic growth nationally or in a certain area, developing technology in a certain area or helping the disvantaged. To be eligible for a small business grant you must meet the criteria, apply and go through a vetting process, the positive side of grant funding is it is generally free (unless match funded).
However, sometimes grants are not the right funding route for your business whether its because there isn’t one that matches your need or you aren’t successful and end up wasting a lot of time and resources on applying for a grant you never recieve.
The Startup Loans Scheme is government stimulus package that gives you access to a low-cost loan and can be an excellent way to fund a new business or expanding an existing small business whether you have access to other sources of finance or not.
For those starting out you can typically borrow up to £10,000 and for those looking to expand/already a bit established it goes up to £25,000. The terms are also usually very favourable compared to traditional lenders but beware a startup loan is personally owed by the entrepreneur who takes it out, not the company (many people do not realise this / read the paperwork here).
Business overdrafts are effectively very fast to setup and flexible business loans if your business needs a constant loan function to trade then they are likely the best solution for you. Be wary though of this type of finance as the rates are usually higher than conventional loans and the bank that gave you the overdraft can demand that you pay back the full amount owed at any point.
Business accelerators typically offers new and startup businesses a small investment in exchange for equity, while providing office space, mentorship, network access and access to further investors once entrepreneurs have completed the accelerator program. They can be a great way to grow your startup business but beware the failure rate after accelerator is exceptionally high and many companies face difficulties transitioning from the high level of support they receive in the program to virtually nothing.
Business credit cards
Business credits cards can be a handy source of finance for trading entrepreneurs but really shouldn’t be used for starting a business, the interest rate and payments periods mean if you fail to pay it is very easy to get into crippling debt. That said if you are a trading business and you need such a facility, it can be a useful alternative to an overdraft which you pay off monthly.
Crowdfunding platforms allow you to raise small amounts of funding from many individual investors or purchasers depending on if you run an equity crowdfunding campaign or a reward based crowdfunding campaign. Keep in mind that it usually takes a significant amount of preparation and marketing to create and run a successful crowdfunding campaign but is an excellent form of alternative finance for small businesses.
Business angels are private investors who are typically former entrepreneurs or wealthy individuals who invest in startup and small companies, in return for taking equity of typically 10-20% they will provide you with initial funding. This funding usually ranges from £5,000 to £150,000. When taking on an investor, make sure you are happy with whose investing in your going to be in business together for a while.
Venture capitalists invest between £350,000 – £100 million into startups and growing businesses with tremendous growth potential and traction. They are professional investors who are responsible for investing and growing some of the world’s most innovative companies including Facebook, Spotify, Airbnb and more. The type of funding is typically reserved for more developed technology businesses and can be complicated as with significant sums of money come more hands-on investors who will want more control over their investment and thus within your business.
If your business is trading and generating revenue, then invoice finance is a great way to improve your cash flow and raise finance quickly especially for service companies with long invoice payment terms of 30,60 or 90 days. Invoice finance means for a fee that a third party will buy your invoice yet to be paid and pay you up to 85% of the value immediately, with the rest being paid when the invoice is paid to them minus the fee.
Asset-based lending is a form of asset finance. If your business has a range of assets such as an office or cars, you can use these items as security (collateral) to get a reasonably significant business loan depending on the value of your assets. Similar to a mortgage, asset based loans are typically undertaken when a business puts up physical assets as security (collateral) to gain access to a loan from an asset finance company.