For small business owners, access to finance is often fundamental to growth and sustainability. However, securing funding can be a daunting task with many options available. In this guide, we will explore some of the numerous ways to raising finance for small businesses.
There are two main reasons a business will require additional funding:
Cashflow: There’s an old saying that ‘Cash is King’ and it’s right, more businesses have gone to the wall due to a lack of cash than almost any other reason. Even a fantastically profitable business can run out of money if the suppliers and staff need to be paid before their customers pay them. This type of funding if often called cashflow finance.
Asset purchase or investment: There are many reasons a business may require additional capital, from letting or buying property or equipment to investing in the future and growth there are a huge number of positive reasons a business may need a capital injection.
Some options to support your business with funding are as follows
Credit Control: If your business is feeling the pinch, the first place to look for cash is your customers. Your first port of call should be any customer that is over their agreed payment terms. Pick up the phone and have a conversation, our record for collecting over-age debts is £25,000 in a day for one of our customers.
Friends and Family: Before you look for the kind of finance you have to pay for, if you have the option, visit friends and family. If your business is strong, you may be surprised at how much others are willing to help you out in the short term.
Overdraft: One of the oldest forms of lending. An overdraft is an agreed ‘buffer’ that your bank will let you dip into monthly. Depending on the amount required your bank may let you personally guarantee the overdraft, for larger amounts you may have to supply security. The advantages of an overdraft are that fees tend to be lower than a loan and you only pay interest on what you use.
Credit Card: Often overlooked by businesses, a business credit card can be a great solution for tight cash flow. There are numerous cards that are free to take out, allow you not to pay interest for 56 days or more, plus you get additional purchase protection and even cash-back.
Invoice Finance, Discounting, and Factoring: These are all variations on a theme where you can release cash from unpaid invoices. If your business has long payment terms, between 30 and 90 days, you can often release up to 90% of the outstanding balance subject to an agreed fee and interest.
Asset purchase or investment:
Traditional Bank Loans: One of the most common ways to raise finance is through traditional bank loans and there are several different products available. Here are three of the most common.
- Personal Loan: Personal loans have nothing to do with the business but are based on your personal financial circumstances. Depending on your business structure you may be able to take out a personal loan, invest it in the business and repay yourself later. Just remember you will be responsible for the repayments.
- Unsecured Business Loan: Generally, this would be for under £25,000 with a repayment term of under five years although some lenders will go over this. Either the bank will take no security or will ask you as the business owner for a personal guarantee. Either way, fees are relatively low, however, insurance rates tend to be higher than a secured loan.
- Secured Business Loan: As the name suggests a secured loan is a loan secured against an asset that either you or your business owns. This could be your own property, business premises (Commercial Mortgage), business assets (Debenture), or something else of value. The set-up cost of these loans and their lead times tend to be higher, but the interest rates tend to be much lower.
Asset Finance: This includes Hire Purchase, Leasing, and Refinancing and generally refers to a loan secured against a specific piece of equipment. These loans are great if you are investing in heavy machinery of any kind.
Government Support Schemes: The UK government provides various support schemes to assist small businesses in raising finance. One such scheme is the Enterprise Finance Guarantee (EFG), which helps businesses lacking sufficient security for conventional bank loans. The Start-Up Loans scheme offers low-interest loans, mentoring, and support to entrepreneurs launching new ventures. Additionally, regional development agencies and local councils often provide grants and loans to promote local economic growth.
Crowdfunding: Crowdfunding has gained significant popularity as a means of raising finance for small businesses. Online platforms allow you to showcase your business ideas or products to a large audience and receive contributions from interested individuals or investors. Rewards-based crowdfunding offers backers a reward or product in return for their financial support, while equity-based crowdfunding provides investors with a stake in the business. Crowdfunding not only raises capital but also serves as a marketing tool, generating buzz and attracting potential customers.
Angel Investors and Venture Capital: Angel investors and venture capital firms can provide substantial financial support to small businesses, particularly those with high growth potential. Angel investors are typically high-net-worth individuals who invest their own money into early-stage businesses. Venture capital firms, on the other hand, invest funds from institutional investors into high-potential start-ups. These investors often bring valuable expertise, networks, and mentorship to the table. When seeking investment from angels or venture capitalists, ensure your business plan is compelling, demonstrate scalability, and articulate a clear exit strategy.
Raising finance is an important step for many business owners to grow and achieve their entrepreneurial dreams.
There are so many ways to borrow money that it can seem a bit bewildering! Whether you need advice on what product is right for your business or in putting an application together, Juggle! can help. Contact us today for a free chat to see how we can help you.