How to finance your new business is an essential part of planning your startup. You might be considering a bank loan, issuing shares, angel finance or a grant – we’ll cover the pros and cons of the options to help you decide which might be best for your business.
Yes, it’s possible start a business with little financing (read our article on starting a small business with just a few hundred pounds) but once you’ve started you might find you need additional resources and financing to grow the business.
Estimating how much cash you will need when starting a business should be an essential part of your business plan, and can be relatively straightforward to calculate how much is needed to get your business through the first initial months of trading when you are likely to have higher outgoings than sales, and can then move to a point where the business starts bringing in enough money from trading to cover expenses.
There are dozens of different options when considering finance, so to help small businesses launch and grow, we discuss the different sources of business finance that are available in the UK.
What Does Business Finance Mean?
The money needed to launch, run, and eventually expand a business is known as business finance. Money is specifically needed for the purchase of different kinds of tangible assets, including equipment, machinery, furniture, buildings, offices, and factories.
As well as intangible assets, like patents, technical know-how, trademarks, and many others.
The daily operating activities of a business, in addition to the assets described above, also needs cash.
This activity entails buying supplies in bulk, paying employees’ salaries and expenses, collecting money from customers, etc. To maintain and expand the firm, you must have enough cash on hand.
Sources Of Business Finance
There are quite a few different types of finance that businesses can either use or get to help start up or expand their business. In fact, raising funds is quite simple, but it’s about choosing the right source for you that has the last drawbacks.
Below, we have put together some of the most common sources of business finance you many come across.
When launching a business, many people will use their own money and personal assets, maybe from savings or even raising a loan against an asset (for example remortgaging their home). This has the advantage of putting you in control, and it might be your only choice when you first start off.
For more established organisations, or when the business begins to expand, internal funding sources become (for the most part) insufficient. This then requires the usage of outside funding.
Bank Loans And Overdrafts
Most consumers turn to their local bank as their first stop when looking for financing. In this sector, banks are quite active, looking for businesses to lend money to.
Banks almost always choose to grant you an overdraft or raise your credit limit instead of making a formal loan, especially in small- and start-up-business scenarios.
With a strong business income, overdrafts are an extremely flexible form of financing that can be repaid earlier than a formal loan.
If an investment opportunity presents itself while you are funding the overdraft, you might consider extending the choices on your overdraft capacity to fund the undertaking.
While, the benefits of a fixed term loan are recognized by many businesses. They can rest easy knowing that the loan’s recurring instalments will make it easier to estimate and plan for cash flow.
Additionally, they believe that a term loan shows a stronger commitment from the bank to their business during the course of the loan. You can call in an overdraft, but the banks cannot take the funds away from you unless you are not making your loan instalments.
Types Of Security Needed
Many smaller loans won’t need any security, but if larger sums of money are needed, the bank will undoubtedly want some kind of security from you.
Although more risk-averse borrowers would wish to avoid doing this, it is customary for business owners to use their own residences as collateral. Any co-owners should be consulted before presenting any form of security for a loan.
This is so they are fully informed of the scenario and any potential repercussions.
The Enterprise Finance Guarantee Scheme is a potential additional source of security. A startup company may be able to obtain a promise for loans towards £1,200,000. Even if it is unable to offer any other kind of security.
The government promises to refund the bank or other lender up to 75% of the loan if you fall behind on your payments. This is in exchange for a 2% premium paid on the loan’s outstanding sum.
Family And Friends
As your family and friends know you and your company and are frequently willing to help out. A loan from them can be one of the simplest sources of funding for small businesses.
Due to the difficulties in obtaining financing before the business has built a trading history and credit rating, it is typically employed by people starting out in business. This type of loan isn’t accessible to everyone, but it can be quite helpful in the right situations.
To avoid misunderstandings or issues later on, it is crucial to approach the arrangement formally as if it were from a bank, with an agreement and clear terms.
With this type of investment, cash is given in exchange for stock in the company. Giving the investor a stake in your business. They will obtain some strategic control, which might take the shape of accepting the investment as a corporate partner, for example.
Naturally, this results in you having less influence over your company. As the stakeholder is allowed to have their say and input as they are helping fund you.
Government Funded Schemes
Businesses that are less than 24 months old can seek a personal start-up loan up to £25,000 that is supported by the government.
You will have your credit verified, as with other loan applications. The majority of startup expenditures may be covered by the loan, but neither training nor debt repayment are permitted.
On rare occasions, local governments might be able to provide grants and loans to new businesses. It is important to note that grants are uncommon, subject to tight eligibility requirements, and frequently targeted at particular business stages or industries.
Making them potentially only useful for certain purposes.
Check with your local council’s department of business services or economic development to see if they have any programs that would apply to you.
An increasingly common and well-liked form of financing that enables people to contribute a small sum of money to a business is crowdfunding. Through internet crowdfunding platforms, businesses searching for financing are typically paired with potential investors.
By presenting your business plan to potential investors and enticing them with rewards, you can raise money. It operates by asking a lot of individuals to invest a little bit of money.
It may be a good approach to generate money for a new project, but you’ll need a compelling pitch to persuade others to participate. Typically, the crowdfunding website will impose a fee as well.
The fact that there is no assurance that the project will receive funding is a drawback. To successfully raise enough money through crowdfunding, a business must be able to effectively sell its products or technology. For new businesses and product launches, it can be incredibly helpful.
Angel Finance And Funding
Rich people or successful businessmen who have retired frequently contribute this kind of support and funding to businesses. Syndicates or networks of angel investors may occasionally be formed by angel investors.
A seasoned individual with experience who can offer knowledge, counsel, and financial backing is generally referred to as an angel investor. Typically, they put down between £10,000 and £100,000. This can make this source of funding priceless for some companies.
You will have to give up some firm equity in exchange for the financial investment, which is a significant difference from the other forms of finance discussed thus far.
Additionally, even if there are no repayments due, the investor may decide to place some limitations on the way their money may be spent.
Enterprise agencies are independent organisations that promote small businesses. In addition to offering business consulting services, they frequently have access to or can point you in the direction of local financing sources.
In England, there is a collection of independent local business organisations called the National Enterprise Network. All these can offer you sources of income for your business.
No matter the type of business financing you choose, it’s critical to develop a strong business case that outlines the benefits of the investment and estimates its return. Banks and organisations will then be enticed to lend you money as a result.
As you can see, there are many different sources of business financing options available to you. You must carefully consider the options you choose because some have more disadvantages than others.
We hope this article has given you an insight on some of the different sources of business finance available to you in the UK.