More than 94% of new businesses don’t make it beyond their first year. One of the most common reasons for this staggering percentage is the lack of funding. Whether you’re a company in the FTSE100 or a small business, money is a crucial resource in business and the fuel that pilots the business towards continuity and realizing returns. It’s why, in every stage of business, entrepreneurs are always looking for new ways to raise funds.
Let’s say your business made it through the first year, but you feel it could do better. You’re thinking of expansion and improved visibility. Funding is necessary, but not easy to come by, and navigating the process is even more challenging. And while some business owners resort to using their money, many others seek external funding.
How to Raise Additional Funds for Your Business
Here are four ways to raise additional funds for your business needs:
Family and Friends Financing
This type of funding involves petitioning your loved ones or friends for funding. The money could be taken as a loan or exchanged for equity in the business. While this type of financing often involves lenient timelines, it can also be risky and emotional. So, before going for this type of funding, ensure that you have a business plan, particularly one primed for strategic growth. That way, they are sold on the plan for the growth and profitability of the business.
Also, it’s best to seek legal advice from a lawyer. You’ll also need a legal presence to broker the terms of the deal and ensure that the loan doesn’t disrupt the relationship you have with friends or family. The last thing you want is for the gesture to be used as leverage against you or put your business at risk.
Angel investing involves receiving funding from affluent individuals known as angel investors. The loan is exchanged for debt that will be converted into equity as your business takes roots and starts to develop. It can further grow into ownership equity, too—where the investors have a residual claim on assets. Angel investors can invest anywhere between tens and hundreds of thousands to millions.
If your business plan is to grow and manage your brand and potentially hand it to your heirs, angel investing might not be the way to go. This funding source is best used when your business plan involves growing and selling businesses, acquiring more businesses, or growing big enough to go public. Angel investors prefer to invest in businesses to get returns on their investments.
Grants and Government Funding Schemes
Grants are easily one of the best funding sources out there. They are typically awarded to applicants, without a requirement to pay them back. Think of it as the grant agency or government investing in your business or idea to help improve the economy and hedge unemployment and poverty. If you run a small or medium-sized business, you could be eligible for a grant to cover some of your needs. Governments typically provide grants to startups and small businesses to cover plant, premises, IT equipment, and machinery costs.
The different types of grants come with unique application processes and eligibility criteria, so there’s no telling if you could qualify. But it’s an option worth considering, especially if you don’t want to bear huge interests. Eligibility criteria typically involve clauses like businesses operating within a specified area, employee numbers (less than 250), balance sheet total of £39,000 or less, eco-friendliness, job creation, and turnover rates of £45,000 or less. Learn more about how to access grants for your business here.
Bootstrapping or Self-funding
Bootstrapping, otherwise known as self-funding, is the process of financing your business from your own pocket. It’s often used during the start-up stage of a business. It can be challenging for new business owners to get any other type of funding without first showing signs of commitment and growth plans. Investing can be done from your savings or structured funds set up for the same purpose. Bootstrapping doesn’t have any of the financial hoops of the previous funding sources because the money is yours to wield.
Self-funding should be your go-to choice for funding when the business is in its very early testing stage. Self-funding also means that you won’t be weighing the business down with loan repayments and you also maintain control of 100% of your business and don’t have to trade equity for funding. However, the drawback with bootstrapping is that it can be overwhelming to finance all your funding needs alone, and it can be time-consuming to generate the capital needed. It can also slow down the rate of potential growth.
Deciding on Funding Sources
When determining the best funding source for your business, two elements to take into account are convenience and costs. Weigh each solution and how they affect your goals in the long term. Don’t forget to determine risk factors and tolerance too.
You’d typically have to decide between using your own money, taking a loan, or pursuing investors. But dealing with repayments and interest rates could slow business growth. On the other hand, investments will have you sharing your future proceeds with shareholders and having to consult with them about business situations.
Fundamentally funding should be a strategic decision. Start with your goals for the business, get professional advice and then get out there and find the funds to make it happen.