There are lots of ways to finance a small business, from turning to family and friends for a loan to seeking investment from enterprise investment schemes. Let’s have a look at five of the most common ways entrepreneurs like you finance their new small businesses:
- Family and friends
- Bank loans
- Crowdfunding
- Short-term business loans
- Guaranteed loans
There are 5.7 million businesses operating in the UK, manufacturing goods, constructing offices, factories, homes or infrastructure and providing services for the UK economy. They employ 27 million people and generate annual output of £1.8 trillion. Clearly funding these businesses to keep them operating smoothly is vital to the UK economy.
Family and friends
Your first port of call for funding as a small business or start up should probably be your family and friends. They will usually be supportive of your goals and vision and they will really want to see you succeed.
Borrowing from family and friends is easy and payment terms and interest charges will be good. It’s the cheapest (possible even free) kind of finance that you can get.
However, financial difficulties can truly test relationships if something goes wrong so make sure you assess the impact of failure carefully before you go ahead.
Bank loans
According to Business Finance Review, figures the loans and overdrafts from high street lenders where SMES hold their business current accounts is still the mainstay of SME finance. Gross lending to SMEs by mainstream lenders stood at £12.2 billion in the first half of 2019.
Some banks will offer great interest rates, especially if you have retained a good relationship with them and your credit score is good. Bear in mind though, that getting bank finance can be a long drawn out and time-consuming process. You might want to try alternative sources of finance if you’re in a hurry.
Crowdfunding
Crowdfunding has grown in popularity in the UK and has become a popular source of funding for smaller SMEs and start-ups. According to Statista the crowdfunding market was worth £68.7 million in 2019 and is set to grow at an annual rate of 8.2% to £94.3 million in 2023. And the average funding per campaign in 2019 was £8,571.
Operating via online platforms, crowdfunding provides a mechanism whereby people can either lend you the money (peer-to-peer lending) or take a stake (shares/equity) in your business.
You therefore need to decide if you are willing to give away a stake in your business or not.
It is most suitable for businesses with a great proposition that will attract plenty of attention. You get a large pool of people who may potentially invest in your business, but it can take a while to reach your target so again might not be suitable if you are in a hurry to raise some capital.
Short-term loans
This kind of loan is suitable for a quick injection of working capital, kick start a new project or to boost cash flow. You need to be confident that you can repay the loan in time.
Interest rates for these types of loans can be high and costs can accrue quickly, although they are normally quick to arrange if you qualify for one.
Guaranteed loans
Schemes like the Enterprise Finance Guarantee are designed for small businesses which don’t qualify for bank lending for whatever reason. They will help if you don’t have any business or credit history, but you will need to develop a plan to demonstrate that your business is viable.
Since its launch in 2009, EFG has supported the provision of approximately.36,000 business facilities to a value of over £3.3 billion. It provides the lender with a government-backed 75% guarantee against the outstanding facility balance, taking the bulk of the risk out of the transaction for the lender.
Enterprise Finance Guarantee is a great source of lending if you’ve tried other traditional routes and been turned down but there are strict conditions to meet in order to qualify.
Whatever your needs the team at Pegasus Funding Solutions has an option for you, with over 600 sources of funding available to choose from.