The six key sources of finance for your small business

The six key sources of finance for your small business

Posted: Wed 18th Dec 2019

Financing a new or growing venture is often one of the biggest challenges you'll face as an entrepreneur. Deciding the route you want to take when it comes to money and investment can have a huge impact on your business. Angela Appiah Shippey outlines your options.

To make an informed decision about what's best for your business, it's important to understand why you're looking to raise capital. To that end, being able to answer the following questions is a good place to start:

  • What is the money for?

  • How much is required?

  • How long is it needed for?

  • How quickly do you plan to pay it back?

  • Are you prepared to give up equity in return for investment?

What follows is our quickfire guide to seven of the most popular financing options available today.

1. Making a personal investment in your business

The whole of our Bristol head office agree that no matter what type of business your looking to start or grow, personal investment is an absolute must.

You need to be able to show potential investors, your customers and even yourself that you're serious about your idea. Investing your own money (and your own time) is a surefire way of doing this.

2. Love money

Love money is often defined as a loan from a spouse, parent, other family member or friend. While there aren't any hard and fast rules of engagement in place for this type of financing, the lender should see a moderate return on investment once the business becomes profitable.

Although this type of financing can seem attractive (little to no interest on the loan, no definitive date in place for repayment etc.), it doesn't come without its own dangers.

Mixing business, money and personal relationships can be a recipe for disaster in many cases. If you think this type of financing is right for your business, our advice is to get an agreement in place that both parties agree to ahead of time.

3. Business loans

One of the more commonly used sources of finance, a business loan is a sum of money borrowed from an organisation to fund growth or expansion plans. Historically, an entrepreneur or business owner would need to secure this type of loan from a bank or building society.

However, in recent years, the options have increased somewhat. In the UK, schemes like the government-backed The StartUp Loans Company offer entrepreneurs unsecured loans up to the value of £25,000.

Often referred to as alternative finance, peer-to-peer lending platforms are another option. Matching lenders with borrowers, loans from these platforms can be cheaper than banks or building societies (especially if you have a good credit rating).

If you're not looking to give away any equity in your business, a loan can be very appealing and, as detailed above, there are now plenty of options available. However, in most circumstances a good idea needs to be backed up with a solid business plan and most start-up loans also
require a personal guarantee. High interest rates may put some off and businesses with poor credit may struggle to secure any capital this way.

4. Business grants for small businesses

Grants and subsidies are non-repayable funds that business owners can apply for. In the UK grants are offered by the government, universities and charities. They're typically awarded to businesses looking to solve specific challenges i.e. improving lives, having a positive impact on the environment, contributing to the local or national economy, or leading innovation in a particular industry or field.

Grants are effectively cash awards that you either won't have to pay back or, at the very least, pay any interest on. As a result, they're highly sought-after and can be extremely difficult to obtain.

To maximise your chances it's important to research and identify grant opportunities that are specific to your business and the products or services you provide. The Entrepreneurs Handbook has a list of small business grants available in the UK.

5. Crowdfunding

As the name suggests, crowdfunding involves asking a large number of people (a crowd) for a small amount of money (funding). Harnessing the power of the internet, those looking to raise funding set up a profile on a popular crowdfunding website like Kickstarter before setting about promoting their idea.

There are two main types of crowdfunding:

  • Reward crowdfunding: Individuals are investing because they have a strong personal or social motivation to do so. Rewards may be offered but returns are considered intangible.

  • Equity crowdfunding: Businesses looking to raise funds through this form of crowdfunding offer investors equity in return for their investment.

Three steps to successful crowdfunding

If you believe crowdfunding is right for your business, there are three steps you need to take when setting up a campaign:

Research the different crowdfunding platforms and identify the right one for your specific needs. Each platform is slightly different; with its own rules, regulations, advantages and disadvantages.

Understand how much capital you want to raise. You'll need this figure to set your funding target. If it's too high, you may struggle to reach it and if it's too low, you may have to run another campaign further down the line (this may take up additional time and resources).

While the first two points are important for getting the foundations in place for your crowdfunding campaign, this final point around marketing is arguably the most important. If you're able to successfully promote your campaign across the right marketing channels for your target audience you stand a much better chance of reaching your target.

6. Raising funding from business angels

Angel investors are wealthy individuals that look to invest directly in a business during the early-stages of development. Angels may look to invest in the region of £25,000 to £100,000. However, this varies depending on the business, opportunity and angel investor themselves.

Beyond their financial investment, many angels act as mentors. Offering the businesses they work with guidance, advice and access to their network of contacts. For many start-ups and early-stage businesses this can be as beneficial as the investment itself.

As is to be expected with the level of investment and commitment of time, angel investors will be looking for a return on their investment and some degree of involvement or consultation when it comes to making the big decisions.

Angela Appiah Shippey is an Enterprise Nation adviser and commercially-focussed Chartered Accountant. Find out more about the services FD Works offers or request a free taster session on her profile page.

I am an experienced and commercially focussed Chartered Accountant (20 years PQE) with a demonstrated history of successfully working as a finance professional across a number industries including PR & Advertising, Legal Services, Banking, Healthcare and Recruitment. This breadth of experience has now allowed me to embrace my role as Client Director and focus on the customer experience side of being an accountant where our role goes beyond just looking at the numbers and instead looks at what value we can bring to our stakeholders.

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