It’s no surprise that every business needs funding, whether it’s a new startup or a well-established small business looking to grow. Establishing and growing a successful business always needs an injection of hard cash no matter how exciting the idea or how great the business model.
But that is often the stumbling block holding back small businesses: how to raise money.
It is tempting to think that you can get a loan from your bank, especially if you have a proven track record with them and a proven business model if you have been trading for a few years. Unfortunately, in our current economic climate that is frequently not going to happen. So if your business, like so many others, has been turned down by the mainstream banks what are your alternatives?
Fortunately, mainstream banks are not the only lenders out there and the rise of the internet has made alternative funding a very viable option for many – and often a cheaper option than a more traditional route to raising finance for a business.
So you’ve got the best idea ever for a new business and it’s sure to be a success but you need an injection of cash to get the business off the ground. While you might be optimistic about your chances of success statistically around half of all start-up businesses fail in the UK within the first 5 years according to various reports, including one from the Office for National Statistics (ONS).
While I’m not knocking optimism – after all where would we all be without a healthy dose – you do need to recognise that loan providers and investors will be thinking statistically not optimistically. Some investors, to be fair, will be prepared to take more of a risk than others but you need to do your preparation if you are to persuade them to take that risk.
Many new start-ups, especially in the tech field, will prepare fully functioning websites, slick videos and build a social media presence before even trying to obtain a loan. That’s a good idea and if you can rope in friends or family to help then do so. If you can’t persuade anyone to help with these early costs, just like many budding entrepreneurs, you may need to sell some assets or use your personal credit cards. Just be careful you don’t risk personal bankruptcy or damage your relationships with friends and family in your rush to get your business off the ground.
According to the National Federation of Small Businesses (FSB) there were 5.5 million private sector businesses in the UK at the start of 2016, which is 2 million more than in 2000. Small businesses account for 99.3% of all private sector businesses – 99.9% of which are small or medium-sized enterprises (SMEs). This century has seen rapid and sustained growth in SMEs yet these statistics don’t show the whole picture and it’s not all rosy because it’s not just start-ups that fail in large numbers.
Thousands of small, established businesses go under each year and the most common reason for SMEs failing is because of problems with their cashflow – balancing the outgoings with incomings. Yet just as there are funding solutions for start-ups with no track record so there are also solutions to this cashflow balancing act for established businesses.
Just one thing to be aware of – if your business needs equipment there are often options to lease rather than buy for which you would not need a loan so bear that in mind, depending on what the cash is required for.
Now let’s take a closer look at seven ways to raise money for a business, whether a start-up or one that has been trading for a few years.
Business loans from mainstream banks usually have a fixed interest rate and either monthly or quarterly repayments and also sometimes a balloon payment at the end of the term. They are a good option for established businesses if your business can meet the bank’s rigorous approval criteria, but often this is not the case, even for businesses with sound financial records.
However, the lending criteria can vary between banks so if your own bank turns you down it may be worth trying another bank that is more open to lending to a business such as yours.
Credit cards can initially seem like a quick and easy way of financing a young business but there are a number of risks to using them. Firstly if they are your personal credit cards then you personally will be liable for any debt on them and that could damage your credit score.
Of course, the other option is to apply for a business credit card. Cards can help a small business over immediate hurdles but just make sure you can afford the minimum repayments before you go spending large sums on a credit card, whether personal or business.
The obvious downside to using a credit card to develop your business is that their interest rates are typically much higher than a bank loan so it is an expensive way to borrow as well as a risky way. If you think there is no alternative then try to find a lengthy zero percent interest balance transfer deal – some are now available for 3 years or more. You just need to be very disciplined about repayments and check the small print first.
An angel investor can be any wealthy individual or group of individuals interested in investing in your business in return for a stake in it. In return for money from the investor they will expect some equity in your company.
If your business is well-established but still needs an injection of money to grow to the next level then it could be a good match for an angel investor.
Of course the obvious disadvantage of this type of investment is that you must relinquish anything from between 10 to 50 percent of your business, effectively giving up full control. And because angel investors will want to take their profit at some point they will expect a plan for a way to do this such as your company being bought out by a larger competitor. So think carefully about whether an angel investor would be right for you.
If an angel investor is interested in your business and can see it’s potential but is not willing to invest cold, hard cash then remember that they may be willing to act as a guarantor for a loan that you take out yourself. If you can subsequently gain their trust and prove your business is succeeding such investors may be more willing to lend money at a later stage.
Guarantor loans are also quicker to arrange than a full investment in the company. And remember you can also ask family members to guarantee the loan too – something they may be more willing to do than to lend you money directly. And the advantage of the loan being yours is you won’t have to give up a share in the business.
Venture capital is major league investment from professionally managed funds suitable for companies with predicted multi-million pound growth. Such investments can be used to develop a new product or expand on an existing product or service.
Just as with angel investors such funding comes at a price – in the form of equity in the company – and is difficult to qualify for. You would need to research different venture capital firms to find those who invest in businesses such as yours, at the developmental stage they prefer, and send them your (professional, well thought out) business plan.
Also check out the areas where your target investors typically make investments as many only cover certain regions. You should also know exactly how much you need because venture capitalists have preferred ranges of how much they like to invest.
Where Angel Investments or Venture Capital Investments are all about wealthy individuals or companies deciding to invest in your small business, Crowdfunding is all about lots of individuals investing small amounts which amount to a large overall investment.
There has been a rapid rise in recent years of online platforms that enable a growing business to contact these types of small investors – and, indeed, for these small investors to have the opportunity to invest in start-ups and SMEs. So much so that crowdfunding is now estimated to raise billions of pounds each year worldwide.
The advantage of crowdfunding is that there is no need to relinquish control of your business. Clearly investors will want a share of the profits but sometimes that can be in the form of a new product your company is creating, depending on the particular company and the investors. Be aware though that some crowdfunding investors will want some form of ownership stake in your company.
Many view crowdfunding as a way to cut out the bank middleman to obtain cheaper loans, which can be true, but raising enough money from crowdfunding requires some serious hard work – not just a professional business plan but also promotional videos and focused social media activity as a minimum. On the upside this is something you should probably be doing anyway to promote your new product or service.
Crowdfunding in many ways is a harder way to secure funding because you are reliant on finding large numbers of people interested in your offering. And with more traditional investment routes you are generally dealing with one person or organisation, often that will provide more than just the money – for example, many angel investors provide mentoring or coaching and banks provide sound business advice.
And finally, before you look at any of the above ways to raise money for a business to grow and develop make sure you check out all the government grants and loans available both nationally and in your immediate area. Some companies have funded growth purely through a series of government grants at the early stages.
However, government grants and loans are very specific to the types of business they support, and also the regions they cover. Many require you to take on a certain number of new employees as their mission is to reduce unemployment in certain areas of the country. Others are aimed at regenerating inner city areas in places like Scarborough, Liverpool, Swansea and Leeds. Nevertheless they are a good source of cash if you meet the criteria and best of all, if you are eligible for a grant you don’t need to pay it back.
You will have to do some serious research to check out what is available at any current time. Grants come and go and you will have to wade through government sites to find all the information you need but it can be worth it.
For example, research & development grants are often dismissed by companies who think they are not doing any research or are not producing a tangible product. But R&D grants can be available for new business processes as well as new products or services so don’t dismiss a grant because of it’s name.
As with any other form of investment in your company you will be expected to have a professional business plan in place, cashflow forecasts and, even better, a fully functioning website, promotional videos and a social media presence. All of which will show a level of professionalism and solidity that the grant-awarding bodies are looking for.
The best place to make a start for government grants and loans is looking at the funding options on the government website to find a scheme that might be appropriate for your business and location. There are over 300 schemes currently available but be aware that most of them will only be available if your business does not qualify for a regular bank loan. That said, some of the schemes have large amounts of money on offer if you do qualify.
For instance loans are available for up to £150,000 for businesses in the West Midlands. And there are a number of grants available in various areas for businesses to move into empty shop locations. In Wales there is financial support for upgrading tourist facilities and Scotland has a whole range of funding available from research and development grants to recruitment incentives and support for innovation.
Every way to raise money for a business requires hard work and preparation by you, the business owner: a business plan, cashflow projections, a professional website and social media presence are the very minimum so before you start looking for funding to grow your business make sure have these things in place.
- Your business startup funding options
- Kickstart your business with a guarantor loan
- Peer-to-peer funding options
Amanda Gillam is Solution Loans's General Manager and has been since 2009. She is also a prolific writer on personal finance issues, and has been quoted numerous times in articles published on 3rd party websites and in press releases. Her...Read more about Amanda Gillam
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