SMEs make up a massive 99.9% of the business population. Despite this, small businesses face an array of challenges that threaten their survival and success, ranging from managing cash flow to finding investment that fuels their growth objectives.
Wherever the issue comes from, it usually highlights a cash gap that needs filling. In these instances, the resolution is raising finance for your business. With funding comes positive cash flow, reduced risk of business failure and financing that pushes you towards your goals.
We’ve put together our nine top tips for raising capital for your business to improve your financial stability and access funding whenever you may need it.
- Understand your need
- Gather financial information
- Craft a business plan
- Decide debt or equity
- Understand your options
- Consider alternative finance
- Consider grants and loan schemes
- Network
- Speak to a commercial finance broker
Understand your need
The first step to effectively raising capital for your small business is understanding your funding needs.
Knowing the issues to resolve makes it easier to pinpoint a compatible solution. Different funding types work best with different problems and goals, so having a grasp on what you hope to achieve will enable you to raise finance appropriately.
Secondly, it will allow you to estimate how much finance you need to raise. Again, this can determine the financial support you choose, so it’s best to go in with a figure in your head.
If you apply for external funding, lenders will ask you why you want the money as part of the application process – so having a suitable answer prepared improves your chances of succeeding.
Gather financial information
When raising finance through an external lender or investor, they will typically conduct their due diligence to ensure your business is reliable to give money to and that it will be used to improve performance.
A significant piece of this due diligence involves reviewing your financial information. This might include historical accounts, bank statements, latest management information or cash flow projections for example.
Before you begin your funding mission, you need to gather this data and put it into a presentable format. Remember that you want to cast an honest but positive picture of your business, proving your ability to manage finance effectively and secure profit with the proper support.
This will improve your eligibility, making it easier to secure the capital you want for your small business.
Craft a business plan
Another integral part of an investor’s due diligence is reviewing your business plan. In some cases, lenders will also ask for a business plan.
A good plan should highlight the value of your SME while including an effective financial strategy that showcases the milestones you intend to hit and how you will utilise funding support. In this sense, your business plan also enables you to identify where you might need the assistance of external capital.
Spend time working on your plan so it represents your business in a good light and answers any queries an investor or lender may have. The key focus should be how you will generate profit, as this signals future success – making someone more inclined to invest or lend to you.
If you’re not sure how to craft an excellent business plan, our guide will help.
Decide whether debt or equity
There are many ways to raise capital. In most cases, these fit into one of two categories: debt or equity.
Debt and equity funding solutions have very different characteristics, which may make one suit your eligibility and preferences better.
Debt funding provides you sums of funding in exchange for regular repayments over a set timeframe. You will be charged interest at either fixed or variable rates until the balance is cleared, and other fees may also apply. The information you supply will determine your ability to repay the debt in the eyes of the lender who may also insist on you offering security.
In the case of equity, you receive investment in exchange for shares in your business. The share value will be negotiated, but you will need to offer a high return on investment to draw investors in. Typically, they will choose to work with high growth businesses, and it is not a short process to find and convince an investor to invest in your business.
By understanding the pros and cons of each type of funding, you will understand the best route to follow for your funding need.
Understand your options
The next step to raising capital is considering the various options on the market and which applies most to you. We’ve listed some popular solutions below, with a brief explanation.
- Business loan – a debt solution, offering various levels of funding in exchange for a regular repayment schedule
- Asset finance – a range of funding products that use your assets as leverage to raise capital
- Trade finance – used to cover the expense and cash flow gaps associated with importing and exporting
- Invoice finance – unlocking capital tied up in your unpaid invoices
- Stock finance – a credit facility using stock sat in your premises as security
- P2P lending – similar to business loan, but where funding is obtained via a P2P platform utilising individual and institutional monies
- Angel investment – seeing high net-worth professionals investing in smaller businesses
- Crowdfunding – where individuals and institutional investors pool their funding to invest in businesses using equity via a platform
- Private equity – investment focused on a variety of businesses where there is room for growth be it through MBO, MBI or turnaround businesses to generate profit
- Venture capital – equity investment dedicated to high-risk, high-reward early-stage ventures
- Mezzanine finance – combining equity and debt to bridge more significant funding gaps
Every option has unique characteristics and eligibility criteria, so it’s worth taking stock of each to determine which best suits your requirements.
Consider alternative finance
It may be worth considering non-mainstream solutions. Alternative finance is increasingly popular in the UK, covering many funding types. Lenders under this umbrella offer flexible and competitive deals for SME’s funding needs.
Alternative finance is readily available, it’s essential to conduct your own due diligence.
These are the main options available to you when raising finance, giving you a better chance of filling any funding gaps.
Consider grants and loan schemes
Another helpful way to source funds for your business is through government-backed support. It typically comes in two forms: grants or loan schemes.
A grant is ideal as it enables you to secure money for your business that does not require equity or repayment. However, they usually have strict criteria, meaning few SMEs can access them. Examples of businesses successfully accessing innovation grants are where their value proposition involves solving a specific issue, such as technological climate change or other social causes.
You will only be able to use the grant for set purposes, so you must abide by any conditions. However, it is still worth reviewing what is available in case any apply.
Alternatively, there are loan schemes designed to help businesses achieve certain goals, including regional investment funds or leveling up programmes. Again, these typically aim to serve a set purpose, such as encouraging SMEs to embrace innovation or addressing regional disparities.
While these loans will be subject to repayment (or perhaps equity, depending on the terms), they tend to offer competitive rates that make them more attractive. Many also include added benefits, such as mentoring and guidance. Again, it’s worth reviewing what is available on the government website and if they’re a fit.
Network
Often, the key to funding success is uncovering practical support. It can be quite a search with many solutions on the market, especially as every business is unique and may not suit ‘one-size-fits-all’ solutions.
Building contacts within the industry will guide you to funding. This could be via relationships directly with investors and lenders who may be able to assist your business or liaising with similar entrepreneurs who share financial support they have found helpful.
Spend time networking to spark the connections that could lead to funding success. You may also experience additional benefits, such as finding potential new customers and partners or practical advice.
Speak to a commercial finance broker
Navigating the financial landscape is a big ask, especially for a small or medium sized businesses. While many options are available, each comes with unique criteria and advantages, making it tricky to decipher which is best for you.
Fortunately, you don’t have to go it alone. By working with a finance advisor with expertise in business finance, you will gain valuable guidance about securing working capital in a sensible way that matches your requirements.
This makes it much simpler to meet your goals with the confidence that you’re taking the correct route.
Conclusion
There are multiple reasons you might need to raise capital for your SME, but in many cases, you will want to do so fast, effectively and in a way that completely fulfils your needs.
There are many options available for small and medium sized businesses, but what works for you will depend on your specific circumstances. That’s why it’s essential to take stock of the options, ensure you can meet the lenders’ criteria, and work with a funder that suits your requirements.
It could be integral to your business’s survival and ongoing growth if you do so effectively.
When you need to raise finance for your small business, working with a broker can enable you to pinpoint a solution that is tailored to you. We work with you to analyse your funding gap in more detail and find options that fit your needs.