Why Seek Funding?
Securing additional funding is often necessary for business growth, whether it’s for boosting production, acquiring another company, or improving cash flow. A variety of finance sources are available, each with its own advantages and drawbacks. One key to success in acquiring funding is having a strong business pitch. Clear and convincing communication of your business’s potential increases your chances of attracting investment.
Different Sources of Business Funding
Broadly speaking, you can raise business finance by borrowing money to be repaid later or selling equity shares in your company. Multiple funding options exist within each category, with the most suitable option depending on factors such as:
- The size of your company
- The amount of money you need
- The nature of your growth plans
- The amount of control you wish to retain
Borrowing options may include:
- Bank loans
- Peer-to-peer funding (e.g., Ratesetter, Funding Circle, Zopa)
Investor options may include:
- Angel investors
- Venture capital
Each type of funding has its own specific features, as discussed below.
Borrow from the Bank
Almost all high street banks offer small business loans with flexible repayment terms, usually between £1,000 and £50,000. Securing a loan is a rigorous process similar to obtaining a mortgage. A detailed business plan with figures and forecasts and a clear strategy for fund usage is essential.
When seeking funds to purchase a business, include in your application the assets you plan to acquire to enhance your appeal to the bank.
Peer-to-peer (P2P) lending connects small-scale investors and small businesses looking for funds, eliminating the middleman. It is a straightforward online application process, offering loans ranging from £1,000 to £1 million. However, the usual rules about debt apply if repayment becomes difficult.
Angel investors are high-net-worth individuals who invest in early-stage businesses. While the investment amount can reach up to £1 million, angel investors often offer expertise and advice that is as valuable as their financial investment.
Venture capital (VC) firms are suitable when you need substantial money, usually more than £1 million, and are willing to exchange a large percentage of your business. VC is popular among high-growth startups, often requiring multiple funding rounds before becoming profitable.
Crowdfunding allows you to raise funds online. It is especially effective for consumer-facing businesses with products or visions that resonate with the public. Companies have been known to raise impressive amounts, with some sourcing over £4 million through thousands of micro-investors.
Use Your Own Money
You can invest directly in your business if you have sufficient personal funds. This could be done by buying more shares, thereby increasing business assets. Alternatively, you could temporarily lend money to your company via a director’s loan account.
Small Business Grants
Government grants for specific types of expenditure are also available. Eligibility and application processes vary, so a thorough exploration of options is recommended, especially for new businesses.
Here’s where to find out about the various grants available in different parts of the UK:
- Grants in England (and wider UK): Business Finance Support Finder
- Grants in Wales only: Business Grants
- Grants in Scotland only: Funding Opportunities
Bootstrapping refers to the process of using your own savings, personal debt, or revenue from the business to finance your company. This method is beneficial in that it allows you to maintain total control over your business. However, it requires careful financial management and is often coupled with a slower growth rate.
Factoring or invoice advances refer to a method where a business sells its outstanding invoices to a third party (a “factor”) at a discount. This can be a useful method for businesses with long invoice payment terms to improve their cash flow. However, this method can be more expensive compared to traditional loans.
Microloans are small, short-term loans offered to businesses. These loans are often given to startups or newer businesses with smaller capital requirements. Microloans are an excellent option for businesses that need a small amount of funding to start, but they do come with higher interest rates.
Friends and Family
Another common method of financing is through friends and family. They might be willing to provide funds as a gift, a loan, or in exchange for equity. While this can be a fast and easy way to raise capital, it could potentially strain personal relationships if the business does not perform as expected.
Remember, it’s crucial to understand each funding option thoroughly before making a decision. Research all your options, consult with financial advisors if possible, and select the one that best suits your business needs and goals.
Here are some resources where you can learn more about the different funding options available:
- Entrepreneur’s Guide to the Different Types of Business Financing
- How to Choose the Best Financing Option for Your Small Business
- Small Business Financing Options
Which is Right for Me? Choosing the Best Funding Option
Considerations when choosing a funding option for your business extend beyond just cost and convenience. It’s crucial to reflect on how each solution aligns with your long-term goals and to assess the risks associated with each choice.
The primary decision lies in choosing to either borrow or seek investment.
When you opt for borrowing, you maintain complete ownership of your business. However, the requirement of regular repayments may impose a continual financial strain, potentially hindering your business growth.
On the other hand, investment provides an immediate financial boost that doesn’t need to be paid back, possibly catalyzing faster growth. But this method involves sharing the fruits of that growth with your shareholders.
For a more precise and personalized decision, consult your accountant. They can guide you through your strategic planning process and help identify the most suitable options given your unique circumstances.