As an entrepreneur with a brand new business, you are most likely always looking for funding. And with rising interest costs, raising capital is one of the biggest challenges you face as a new business owner, but while it can be difficult, it's far from impossible.
In fact, there are several good ways to go about it, and we're going to talk about a few of them in this article. But before we get to that, we must first discuss a few things about the nature of funding, what your needs are, and how much you want to get. Then we can move on to exploring some options for your business!
Be Aware Of The Market For Funding
Before you can start working towards raising capital, you must first become acquainted with the general funding landscape. There are thousands of small businesses cropping up every year, and they all need capital - where are they getting it, and where should you look for it? If you're a start-up, a loan from the government may be accessible to you, so check out GOV.uk.
While the reliable source of funding were bank loans for the small business sector, the past few years brought some pretty drastic changes. The financial crisis of 2008 left a lot of businesses and institutions reeling, and banks and other traditional financial institutions have been - and still are, to a degree - less than willing to lend to small businesses.
That creates challenges, it's true; but it also created new ways to raise capital, as others have stepped into that niche and have taken over funding. Challenger banks are just one of the options that allow you to pursue funding for a SME.
How Much Capital Do You Actually Need?
Before you make any moves, you need to first determine what your needs are - and how much do you need to meet them? There are several areas that you may have in mind that need to be in tip top shape before you can pursue funding.
- A thorough, well put together business plan is essential, because it shows your potential investors or lenders what you are using their money for, how you are going to repay it, and it gives them an idea of how likely it is that they will receive their payment.
- Make sure to mention the impact of cash flow in a case where you don't make enough sales or when customers are late on paying invoices.
- Set aside some working capital for emergencies, or unexpected situations that may - and will - arise at some point.
- Finally, different types of financing will suit each of your needs: asset finance for machinery, leasing for any business vehicles, etc.
What Are Your Options In Terms Of Funding?
Because of what we were talking about above about the economic recession, banks have been reluctant to lend, but other options have emerged in the place of traditional loans, which means that now the market is wider, and you have a choice, so you can afford to have a think about the best option for you and "shop around" for capital, if you will.
The very important first part is to do proper research into the matter and figure out what is the most appropriate avenue for raising money for your particular business needs. Bank loans are just one of the options, with angel investors, crowdfunding, and even newer funding platforms being some of the alternative financing options. GOV.uk has excellent resources in this direction if you need them.
Advantages and disadvantages will exist for every option, so you need to weigh them carefully against each other. You can't go in expecting free money, so be prepared to think about how much repayment is going to cost, or what you can offer in exchange for the money, whether it's shares in your company or something else you can offer to people contributing to your crowdfund.
Remember when you're making a deal that you are partnering up with people you will have to work around long-term, so it's worth thinking about carefully. Consider looking for money ahead of time, because you won't have a pressing need for capital, which sets you in a better position, negotiation-wise.
Crowdfunding has become very popular in recent years, not only for raising capital for businesses, but also for other different kinds of personal projects and endeavours. All you need to do is state your goal and what you are trying to achieve, and people will donate however much they want and can afford towards your goal.
Crowdfunding can be accessed on a dedicated plaform, but you should be aware that there are other adjacent types of funding included in this term, such as equity crowdfunding, or peer to peer loans. Both of these options work about the same way, with the difference that while the latter is a regular loan you repay with interest, the former is an exchange of shares for capital. The top 3 crowdfunding platforms for your purpose are CrowdCube, Seedrs, and Indiegogo, but Growth Business has a good top 10 if you're looking for more options.
2. Bank loans
Just because they've been more reluctant to offer loans doesn't mean that banks are completely out of the question as a financing resource. In fact, they can provide great help, and even offer a relationship manager that can contribute to the growth of your business. Banks like HSBC, Lloyds Bank, Barclays, or NatWest all offer small business funding options.
Take the time to look for a bank that is willing to work with you and lend not only money, but support. A lot of them will be willing to help you with anything you need to develop their business, as it is in their best interest, as well.
3. Organic growth
Organic growth occurs when you take the profit you make and reinvest it back into your business, in order to help it grow and expand. However, you have to keep in mind the fact that the process is going to be slow, so patience is necessary. It might even take years to break even.
On the upside, you don't run into the issue of having to pay interest or owing anything to anyone, whether it's lenders or investors. Organic growth can be an excellent choice of initial financing, but with the growth of your business, an alternative may be necessary for raising capital.
4. Asset finance
Asset finance actually works in two different ways, depending on your needs and the stage you are at. Firstly, there is an option of essentially borrowing large, and expensive assets such as machinery, or paying for it in instalments (known as hire purchase), because the outright full cost would be prohibitive. Then you have what is actually a kind of refinancing, where you use vehicles, buildings or other assets the business owns as collateral for a loan.
5. Family and friends
Relying on family and friends is always an option, if they can afford it and are willing to help you out with the funding you need. A lot of small business owners seek capital from their friends and family, either in exchange for a stake in the company, or as a low-interest or even 0% interest loan.
The obvious drawback here is that you may be reluctant to mix family and money, because there is always a chance that one side will feel slighted or ripped off. It's very easy to create rifts and damage relationships.
6. Invoice finance
Sometimes, clients can take their sweet time paying invoices - leaving you scrambling for funds in the meantime and messing with your cash flow. Invoice finance enables you to get the money you are owed by the client. You pay a fee for the service, and receive the majority of what you are owed instead of waiting to get paid.
The advantage is that you will be able to use funds that would otherwise be tied up, but of course, the negative is that you do need to pay the fee for the convenience. If you're still not quite sure on invoice finance, The Telegraph breaks down this finance option for you.
7. Funding platforms
Funding platforms - not entirely dissimilar to peer to peer platforms - have been created, with the purpose of enabling encounters between SMEs in need of capital and the lenders who are interested in providing that kind of cash. The Federation of Small Businesses actually manages something like that.
In conclusion, as luck would have it, there are numerous avenues to pursue funding for your small business. There is no one ideal choice with no drawbacks, and there is no perfect solution for all needs and all businesses. The one you pick will be based on what your specific business needs and what your goals are in terms of expanding the business and moving forward.
Like in any other industry, networking and being connected pays off, because you will have access to opportunities that you may have perhaps passed over under different circumstances. Do your research, pay attention, and weigh PROs vs CONs for the best choice.