There are many ways to fund a business. To give you an overview of some of the popular sources of funding, read on.
To explore further download our whitepaper on funding types for SMEs
Here is a list of 7 of the most popular sources of funding:
- Business loans
- Crowdfunding
- Peer-to-peer finance
- Business mortgages
- Angel investors
- Government grants
- Friends and family
Business loans
The traditional port of call for most business borrowing is your bank. However, SMEs can sometimes struggle to access funding through traditional channels due to high interest rates and rigid repayment options. However, there are now a number of alternative lender solutions in this space that can provide your business with the funding it needs. It’s just a question of knowing where to look.
Crowdfunding
Although crowdfunding is a relatively new concept – it’s been around for a little over 10 years – it has become a popular way of obtaining funding in exchange for equity. Crowdfunding is driven by online platforms. The fact that it’s an online activity makes crowdfunding appear a relatively easy way of getting the funds you need to get control of your cashflow and promote growth in your business.
However, there are a few challenges to getting the right funding. You have got to put in a lot of leg work to get traction for your project as a viable business which will attract backers in the first place. Success is not guaranteed because as crowdfunding has increased in popularity the ‘savvy’ of potential investors has also increased. Discerning crowd funders are becoming more selective in the projects that they choose to back.
You need to have the winning combination of strong marketing, solid, trustworthy management and a quality product or valuable service.
Read our blog about crowdfunding for more detailed information on your options.
Peer-to-peer finance
Peer to peer finance is a mechanism that brings together individuals or businesses seeking to lend money to businesses who are looking to borrow money without going through a bank. A good example of a peer to peer lending platform is Funding Circle.
On some sites, lenders can choose which borrowers they want to lend to. On others the money invested via the site is split automatically between a number of borrowers.
P2P lending is a good solution if you’re looking for a loan over a fixed period of time, compared with a conventional business loan as it is quicker. Even better if your company is in a strong cashflow position and has assets to secure against the finance. Asset-backed debt will always help to keep the interest rate lower and a good cash flow reassures investors that late payments are unlikely. Conversely, it’s not an ideal option if you feel the regular repayments will be too much of a burden on your business.
Business mortgages
If you are looking to purchase buildings or land for your business, then you best option is to take out a business mortgage. They are affordable, flexible and are suitable for both owner-occupiers and commercial investors. There are distinct products tailored specific needs depending on whether you occupy your own premises or are seeking to buy-to-let.
You can use a business mortgage, or a variant thereof such as bridging and development finance, for a variety of purposes including:
- Developing or extending existing property or premises
- Financing commercial developments or projects
- Purchasing land on which to build new premises
- Funding buy-to-let residential housing projects
You need to be aware that business mortgages are very bespoke, based on complex pricing models and the verdict of lending panels at each individual lender. That’s why the value of a qualified consultant within this field cannot be underestimated. A good consultant will be able to negotiate the best rates with lenders.
Also remember that in addition to valuation, arrangement and legal fees, there are often other associated costs and lender fees are typically around 1%. Most small or medium-sized loans offer an LTV of 75%, sometimes up to 80% over 15 years, and sometimes up to a maximum of 30 years.
Angel investors
If you have a great business idea which is just getting it off the ground, and you need finance to move it to the next level, you could consider angel investment. It’s a great way to achieve business lift off at an early stage.
Angel investment is a form of equity finance in which high net worth individuals – Angels – look to provide financial backing for start-ups and businesses in their early stages in exchange for equity or shares in the business. If you think Angel investment is for you, then you need to be sure that you are comfortable with ceding a stake in your business to a third party.
Before you start looking for Angel investment you will need to put together a first-rate business plan and a financial model for the next three years of your trading which include monthly cashflow and profit and loss and balance sheet details. Off the back of this you will also need to provide a pitch deck.
Contact one of our experts for more detailed information
Government grants
There are plenty of government grants that are available for businesses that are already established and looking to grow. They can help find professional advice, training or capital purchases and enable you to grow. However, they can be a challenge to get because the application processes and the criteria can be complex and quite onerous.
There are several types of government business support available including direct grants, equity finance and soft loans.
Direct grants are usually given to cover immediate costs including training, investment in equipment and reaching out into new markets.
Although not strictly grants, some equity finance schemes offer up to 50% reductions in income tax on investments made in businesses up to £100,000. Your business needs to be under 2 years old and have fewer than 25 employees.
Because each scheme is different you will need to check the criteria carefully. Do your research. Talk to awarding bodies before you apply to assess your chances of success. Make sure you read the grant objectives and ensure that you write your application to address them. Make sure you have quality business plan in place and check your existing funding. Most grant schemes will match the investment you are willing to make into your own business, typically from 20% up to 50%
Call us for more information on grant options available to fund your business.
Friends and family
Approaching friends or family for a loan or equity, or even relying on your personal savings is still a popular finance option for SMEs in the UK.
There are significant potential advantages to seeking finance from those closest to you. You don’t have to deal with the banks. Friends and family are likely to have a better appreciation of your business and are likely to be more understanding should things not go exactly as planned. You are also likely to get a better rate from friends and family than you are on the high street.
Many of those who borrow from friends and family do so from those with existing business experience. This can also be hugely beneficial, particularly to first-time entrepreneurs, as these individuals can often contribute valuable knowledge as well as cash.
However, it is important that you treat finance from friends or family exactly as you would funding from a bank or other lender. Is the money a loan, or is it being invested in exchange for equity? How long is the term of the loan? At what rate is it being lent? When will repayment be expected? It is vital that you have these crucial aspects set out in writing before you accept the loan. You may wish to seek professional legal assistance to help you draw up this document. This might seem like overkill, but it will help to avoid the potential for misunderstandings and can prove vital in ensuring that things don’t turn sour.
In addition to the methods of finance that we have already mentioned, you could also look at:
- Private Equity finance
- Invoice financing
- Business credit cards
Private equity finance
Private equity investors buy companies and business assets in order to sell them on for a profit.
Private equity firms gather a fund of money and invest in underperforming businesses with a view to turning them around and exiting with a positive gain, or high growth businesses. Investors generally assume a managerial interest in the business as well to help shape the future direction. Therefore, equity finance is only useful to you if you are happy for third parties to have a stake in your business.
Private equity investors will take a very hands-on approach to being involved in the day-to-day running of your business, often making significant changes from the outset. They will provide financial, strategic and operational input as required in order to steer the business to an enviable position and will typically look to exit the business between 3 and 7 years.
Invoice financing
Borrowing cash against your unpaid invoices is a quick win where cash is badly needed to stem a cashflow crisis. For a fee, a factor or invoice discounter will typically pay you 70-90% of an invoiced amount owed to your business up front.
There are two types of invoice finance, factoring and discounting. Which one you choose depends on whether you want to retain control of your sales ledger or are happy for a third party to take control of it.
Business credit cards
Business credit cards are a valuable source of short-term funding for immediate cashflow and operational issues. You need to be careful and compare APRs and annual fees that you will have to pay. These can vary considerably from card to card. Some business cards will offer you a grace period in which you can pay off any purchases before you start to accrue interest.
It’s definitely a short-term solution to finding as using a business credit card can be an expensive way of borrowing.