Why seek funding?
If you have big plans for the future, you may need additional funding for business growth. This might be for something as simple as boosting production, or a step as ambitious as buying another company. It may even be simply to improve your cash flow. Whatever your goals, there are various ways to source the necessary finance, each with its own pros and cons.
Whatever kind of funding you seek, it is vital to have a very strong business pitch. The more strongly you can communicate your business’s prospects, the more likely you are to get investment.
Different sources of business funding
There are a number of different ways you can raise finance for your business, but they divide broadly into two types: borrow money to be repaid later, or sell equity shares in your company. You will however find a variety of funding options within each type, and the most appropriate for you will be determined by your circumstances, such as:
- the size of your company
- how much money you need
- the nature of your growth plans
- how much control you want to keep
Your borrowing options may include:
- Bank loans
- Peer-to-peer funding (e.g. Ratesetter, Funding Circle, Zopa)
Your investor options may include:
- Angel investors
- Venture capital
Read on to find out more about each type.
Borrow from the bank
Almost all high street banks offer small business loans, generally between £1,000 and £50,000 (Approx. $1,213 and $ 60,620) and with relatively flexible repayment terms. Securing a loan can be a challenge, rather like getting a mortgage but even more so, as you need to demonstrate that you are a good investment and will be able to repay. A watertight business plan is a must (with figures and forecasts built into it by your accountant), along with a very clear strategy for how you will use the funding.
If you are seeking funding to buy a business, make your bank aware of the assets you’ll be buying, as these can strengthen your application (since you’ll be borrowing against them). Just remember to include liabilities too.
Peer-to-peer (P2P) lending matches up smaller-scale investors with small businesses looking for funds, cutting out the middleman. You apply online, and get a loan drawn from cash pooled by savers looking for a better return on their money. This type of finance is easy and simple to apply for, and you can borrow as little as £1,000 or as much as £1 million. Repaying a P2P Loan is similar to repaying a bank loan, with the interest rate agreed upfront. However, if you struggle to repay then the usual rules about debt apply.
Angel Investors are usually high-net-worth individuals who invest in early-stage businesses. It’s sometimes called ‘seed’ funding and you can generally expect to raise anything up to £1 million. Like venture capital, angel investors tend to invest in exchange for a share of the business, so they must believe in your business and in you. Often successful businesspeople in their own right, angel investors may have expertise and advice that can be as valuable as their money when it comes to growing your business.
The next step up from the angel investor is the venture capital (VC) firm. You might try a VC firm when you need a serious chunk of money (often in excess of £1 million) in exchange for a large percentage of your business. VC is the fundraising method of choice for high-growth start-ups, many of which go through several rounds of funding before becoming profitable. It’s a very competitive area, so you’ll need an outstanding strategy, a bulletproof business plan and a dynamite pitch – not to mention luck.
You can also raise funds online via crowd funding. This works best with a consumer-facing business, with a product or vision that ordinary people can get behind. You put out the message that shows why your enterprise is a good investment, and a (hopefully large) number of investors each take small stake in the business. It’s essentially a digital-age version of selling shares, and has been seen to raise impressive sums – some companies have sourced over £4 million via thousands of micro-investors.
Use your own money
You can of course use your own money to fund your business, assuming you have enough. If your business is a company, then one way is to invest in share capital, by buying more shares. This has the effect of increasing the assets of the business, but will tie up your money until you sell those shares.
You can however put money into your company on a temporary basis by lending it, via your director’s loan account. You can then have this money paid back to you when this becomes necessary or practicable.
Small business grants
You may be eligible for a small business grant to cover certain types of expenditure. Government grants are available for startups and other small businesses to cover things like the cost of premises, plant, machinery and IT equipment.
Each grant will have its own application process and strict qualification criteria, so there is no guarantee you will be eligible. But it is worth exploring your options, particularly if yours is a new business. So, start finding the grants you may be eligible to get from the government of your own country.
Which is right for me?
Cost and convenience aren’t the only factors when seeking funding for your business. Consider how each solution will fit into your long-term goals, and weigh up the risks of each one too.
Your main choice is whether to borrow or seek investment. Borrowing means you retain a full stake in the business, but repayments can be an ongoing burden that may slow your growth. Conversely, investment delivers a cash injection that you don’t have to repay, so growth may proceed more quickly – but you’ll have to share that growth with your shareholders. Talk your strategy over with your accountant to narrow down the best options in your circumstances.
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