Funding is invariably a problem when you are starting out in business. And then, when you’re starting to establish yourself it’s not unusual to hit another funding gap. More orders start to come in and you don’t have the funds to get the stock or pay the salaries until payment is due. Or you need that new piece of equipment or refurbishment to get to the next level or stay competitive.
Whatever the reason, more businesses close down because of poor cash flow than any other reason; not because they are unsuccessful, but because they don’t have the funds to plug that gap. Try to plan ahead and anticipate funding needs and from the start make sure that you have a great credit control and financial management system in place.
When and if you do need funding, here are some ideas to think about:
1. Friends and family
Relatives or Friends are one of the main sources of finance for small business owners looking for support. But make sure you have a clear contractual arrangement. Clarity from the start will help you maintain good relations if things go wrong.
2. Offering shares
Shares in your business could be sold to your personal contacts or to an outside investor. However, be aware that many investors will want a sizeable chunk of your business – or even control – before they will risk their cash. The UK currently has one of the best tax break schemes in the world, the EIS, for anyone investing in an eligible business or startup.
3. Startup Loans
There are lots of options for small business loans for startups. But if you are in the UK it is well worth looking first at the Startup Loans scheme. This is a government-backed scheme offering loans of up to £25,000 at a reasonable interest rate to new ventures. The loan comes with advice, support and a business mentor. See here for inside tips on the application process.
If you own your own home and are looking to borrow amounts that go beyond £25,000, it can be worth trying to seek an advance from a mortgage lender or looking to remortgage. The mortgage application process isn’t usually too difficult and if you have the equity available, business development initiatives may be considered favourably.
5. The Bank
Banks are the main providers of business finance in the UK. Their core business finance products are loans and overdrafts. Those bank products account for over half of all UK business finance, Your high street bank isn’t a risk-taker and will generally ask you to provide full security for a business loan. If you don’t have the security needed for a bank loan, don’t despair quite yet. You may be able to apply for a government-backed loan through the Enterprise Finance Guarantee Scheme. Those loans are delivered through lenders, including most high street Banks. They assess your application for viability and if approved the EFG scheme guarantees 75% of the loan. Ask your bank for more details.
6. Community Development Finance Initiatives
CDFIs can also provide loans for businesses with a viable proposition and no security. For CDFIs in your area see our article on community banking.
7. Government grants
Government grants to support start-ups and growing businesses come and go. To see what is available it is worth talking about grants to your local Enterprise Agency, Growth Hub, or your Council’s economic development unit. For tips on how to increase your odds of grant funding success, check out our article on grants for women in business.
8. Using a credit card
Raising finance on a credit card for business purposes can provide a quick stopgap solution. This is one of the short term financing solutions you can choose. But make sure you understand the worst-case scenario if your plans don’t work as you hope.
Crowdfunding can be a great way of raising funds and profile at the same time. There are two types: reward crowdfunding, where supporters pre-purchase your product or service or some other gift; equity crowdfunding, where supporters buy micro-shares in the business. For both types you will need to market and promote the crowdfund heavily to your network.
10. Peer to Peer lending
Peer-to-peer (P2P) connects people or businesses that need loans with individual investors. Funding Circle is the best-known UK peer-to-business funder. It has lent £7.5 billion to 72,000 small businesses since launch in 2010. Funding Circle offers loans of between £5,000 and £350,000 to established businesses. Loans can be for: working capital, expansion, asset finance or one-off business expenses. Interest rates are generally a little lower than the high street, starting at 4.9%. Decision
making is faster. Loans may be secured or unsecured depending on the value and purpose.
When approaching individuals or organisations for finance you will need a good business plan. You can download our free template here. Adapt it for every pitch. Put yourself in the lender’s shoes and show how you will repay the money. Writing a plan for your business will give lenders a great overview of your business journey and also remind you of why you do what you do, what you’ve achieved and where you want to be. Enjoy the journey!