Starting and running a small business is a dream for many entrepreneurs. It's a chance to turn your vision into reality, work on your own terms, and be your own boss. However, as any small business owner knows, managing the finances can be one of the most challenging aspects of running a business. Especially when it comes to raising funds and getting your business off the ground. So what are the best methods for how to raise funds for your small business?
TABLE OF CONTENTS
- How to raise funds for your small business (alternative methods)
- Unsecured business loans
- Crowdfunding and peer-to-peer lending
- Invoice finance
- Angel investors
- Government grants
- Creating a compelling pitch and attracting investors
- How to raise funds for your business (traditional methods)
- Bank loans
- Business overdrafts
- Business mortgages
- Credit cards
- Business line of credit
- Important things to consider when sourcing business funding
- Personal guarantees
- Credit scores and credit reports
- Business plan and financial projections
- Tax implications
- Repayment and default
- The final say on how to raise funds for your small business
- More resources for starting your own business
How to raise funds for your small business (alternative methods of finance)
In this article we'll explore the various alternative forms of financing available to small businesses that may be more accessible and beneficial than traditional bank loans. Whether you're just starting out or looking to expand, understanding the options available to you is crucial for the growth and success of your business.
As you read on, you'll learn about the different types of funding available, including crowdfunding, angel investors, and government grants. You'll also gain insights on how to create a compelling pitch and attract potential investors.
Starting a small business is a challenging but rewarding journey, and with the right funding, you can turn your vision into a thriving enterprise. So, let's dive in and discover how to raise funds for your small business and turn your financial challenges into opportunities.
Unsecured business loans
Unsecured business loans are a popular option for small business owners who may not have many assets to use as collateral. As the name suggests, these loans are not backed by any physical assets such as real estate or equipment. Instead, they are based solely on the borrower's creditworthiness. This makes them a great option for small and home-based businesses that may not have many assets to offer as collateral.
One of the biggest advantages of unsecured business loans is that they can be obtained relatively quickly, as the approval process is typically faster than that of secured loans. This can be especially beneficial for small businesses that need funds immediately to cover expenses or take advantage of a business opportunity.
However, it's important to keep in mind that unsecured loans come with a higher level of risk for the lender. As a result, interest rates and fees on these types of loans are often higher than on secured loans. Additionally, lenders may require a personal guarantee from the borrower to mitigate this risk, which can put the borrower's personal assets at risk if the loan is not repaid.
Overall, unsecured business loans can be a good option for small businesses that need quick funding and don't have many assets to use as collateral. However, it's important to carefully consider the terms and conditions of the loan, as well as your ability to repay it, before applying. If you can't afford to pay it back then you could end up in serious financial difficulty.
Crowdfunding and peer-to-peer lending
These are two similar, but also quite different products. Crowdfunding and peer-to-peer lending are two alternative forms of financing that have gained popularity in recent years. Both options offer small business owners the opportunity to raise funds from a wide range of investors, rather than relying on traditional sources such as banks.
Crowdfunding is a form of fundraising that allows businesses to raise money from a large number of people, typically through an online platform. There are two main types of crowdfunding: reward-based and equity-based:
- Reward-based crowdfunding is when businesses offer rewards, such as products or services, to investors in exchange for their investment. For example, if a business is launching a new product line, they may offer investors a lifetime of free or discounted products in exchange for their investment.
- Equity-based crowdfunding, on the other hand, involves offering shares in the business in exchange for an upfront investment loan. This type of crowdfunding is riskier for investors as the success of the business is closely tied to the value of their shares.
Peer-to-peer lending is another popular alternative form of financing that allows businesses to borrow money from individuals, rather than from traditional financial institutions. This eliminates the need for intermediaries and can result in lower interest rates and fewer financial checks. However, it's important to note that peer-to-peer lending is not secured by any government guarantee.
Overall, crowdfunding and peer-to-peer lending can be a good option for small businesses looking for alternative forms of financing. However, it's important to carefully consider the risks and benefits of each option before deciding which one is right for your business.
Now, this one appeals to many small businesses as we all know the annoyance of waiting on invoices that haven’t been paid on time. With invoicing finance, a third party agrees to buy your unpaid invoices for a fee, meaning that you can maintain a steady cash flow. This allows you to access cash sooner than you would if you had to wait for your customers to pay the invoices.
There’s three different types of invoicing financing:
- Invoice factoring
- Invoice trading
- Invoice discounting
Let's explore each in more detail. With invoice factoring, your invoice financier will ‘buy’ the debt owed by the customer when you raise an invoice. They take a percentage of this debt as interested and this is where they make their money. They make the remainder - usually around 85% - available upfront, leaving you with a steady cash-flow and the financier with a cut of your sales.
Invoice trading is similar to invoice factoring, but it instead uses online platforms to allow businesses to bypass traditional financiers and obtain finance from individual investors instead, a little like peer-to-peer.
And lastly, there’s invoice discounting. This is when the invoice financier doesn’t manage your sales ledger or collect debts on your behalf. They instead lend you money against your unpaid invoices for a pre-agreed fee. You’re free to collect your debts and remain as the point of contact for your customers, meaning the fact that you’re borrowing money can stay confidential.
Each type of invoice finance has its own set of benefits and risks, so it's important to carefully consider which one is right for your business. Obviously, they all come at a cost to your business and are only applicable once your business is up and running with outstanding client invoices.
Angel investors are high net worth individuals who invest their own money in start-ups and small businesses in exchange for equity ownership. They typically provide funding in the early stages of a business, when traditional funding sources such as banks are not yet willing to invest.
One of the benefits of angel investing is that it allows businesses to raise capital without taking on debt, which can be especially beneficial for small businesses that may not have the ability to take on additional debt. Additionally, angel investors often have industry experience and connections that can be valuable to a business.
However, it's important to keep in mind that angel investing is riskier than traditional forms of financing and businesses may have to give up a significant amount of equity ownership in exchange for funding. Additionally, it can be difficult for small businesses to attract angel investors as they typically only invest in businesses that have a high potential for growth.
Government grants are financial awards provided by government agencies to businesses and organisations to support specific projects or initiatives. These grants are typically awarded to businesses that are working on projects that align with the government's priorities, such as research and development, innovation, and job creation.
One of the benefits of government grants is that they do not have to be repaid, unlike loans. Additionally, government grants can provide funding for specific projects that may not be eligible for other forms of financing.
However, it's important to keep in mind that government grants can be highly competitive and the application process can be complex. Additionally, the funding available through grants is often limited and businesses may have to meet certain conditions or milestones in order to receive the funding.
Creating a compelling pitch and attracting investors
Creating a compelling pitch and attracting investors is an essential step in the process of raising funds for your small business. A well-crafted pitch can help you stand out from the competition and increase your chances of securing funding.
When creating your pitch, it's important to keep in mind that investors are looking for businesses that have a clear and compelling value proposition, a well-defined target market, and a solid plan for growth and profitability.
Here are a few tips to help you create a compelling pitch:
Clearly communicate the problem your business solves: Investors want to understand how your business addresses a specific need or problem in the market.
Highlight your competitive advantage: Explain how your business stands out from the competition and what makes it unique.
Show your financials: Provide projected financials, such as financial projections and cash flow statements, to demonstrate the potential for growth and profitability.
Be prepared to answer questions: Be ready to answer questions about your business, your team, and your plans for business growth.
Practice, practice, practice: Rehearse your pitch and be ready to adapt it to the audience you're presenting to.
In addition to creating a compelling pitch, it's also important to reach out to potential investors in the right way. Networking events, pitch competitions, and online platforms are great ways to connect with potential investors and showcase your business. Building a strong online presence, through social media, website, and search engine optimisation can also help attract investors.
It's also important to be patient and persistent in your efforts to attract investors. Raising funds for a small business can take time and it's important to keep in mind that not every pitch will result in funding.
How to raise funds for your business (traditional financing methods)
There are also many traditional ways of raising funds for a new business venture in the UK. It's important to note that the availability and terms of these traditional funding options may vary depending on the business, its credit history, and the current economic conditions. Small business owners should research and compare different funding options and consider the terms, fees, and repayment terms before making a decision.
Some traditional methods of raising funds for a small business in the UK include:
A bank loan is a traditional and common method of raising funds for a small business. Small business owners can apply for a loan from a bank or other financial institution to cover expenses such as equipment purchases, working capital, or expansion costs. Banks typically require collateral, such as property or equipment, and a detailed business plan to approve all types of loans, be them equipment, expansion, or working capital loans. The loan amount, interest rate, and repayment terms will vary depending on the lender and the borrower's creditworthiness.
A business overdraft is a type of short-term loan that allows businesses to borrow money up to a specified limit. This can be a good option for small businesses that need to cover unexpected expenses or cash flow gaps. Businesses can use their overdraft as a safety net to ensure they have enough funds to meet their financial obligations, such as paying bills or employees. Business overdrafts are generally easier to obtain than traditional loans, and the interest rates are usually lower. However, it's important to keep in mind that businesses will be charged interest on the amount borrowed, and if the overdraft is not paid back promptly, it can become a long-term debt.
A business mortgage is a type of loan that allows small business owners to borrow money to purchase a commercial property. This can be a good option for businesses that are looking to purchase a property for their own use, such as a retail store or office space. Business mortgages are typically offered by banks and other financial institutions and have similar requirements to traditional home mortgages. Businesses will need to provide collateral, such as the commercial property, and will be required to make regular payments to repay the loan.
Another alternative form of financing that small business owners can consider is using credit cards. This can be a quick and convenient way to access funds, especially for small expenses or unexpected costs. However, it's important to keep in mind that credit cards often come with high-interest rates, and if not managed properly, can lead to a significant amount of debt.
Business line of credit
A business line of credit is similar to a credit card in that it allows small businesses to borrow money as needed, but it generally has more favourable terms. Business lines of credit typically have lower interest rates and fees than credit cards. Additionally, with a line of credit, businesses can borrow money multiple times, up to the maximum credit limit, without having to reapply each time.
Often you can have a line of credit with wholesalers and suppluers. For example, if you are starting a fashion business from home then you may be able to obtain a credit account with a clothing wholesaler. If you need lots of stationery and supplies for your business, you may be able to open a credit account with an office supplies business.
Important things to consider when sourcing business funding
Personal Guarantees: Personal guarantees are a common requirement for small business loans. This means that the lender will require a personal guarantee from one or more of the business owners, which makes them personally liable for the loan in case the business is unable to repay it. When considering a loan that requires a personal guarantee, it's important to consider the risks involved, such as the potential impact on personal credit and assets, and the likelihood of the loan being repaid on time. To minimise these risks, small business owners can consider alternative forms of financing or negotiate more favourable terms with the lender.
Credit Scores and Credit Reports: Credit scores and credit reports are important factors that lenders consider when evaluating a loan application. A good credit score and credit report can increase the chances of a loan being approved and secure more favorable terms. On the other hand, a poor credit score and credit report can make it difficult to secure a loan or result in higher interest rates. Small business owners should check their credit scores and credit reports regularly and take steps to improve them, such as paying bills on time and reducing outstanding debt.
Business Plan and Financial Projections: A business plan and financial projections are important tools for raising funds for a small business. A business plan should include a detailed description of the business, its products or services, target market, its business strengths and competition. Financial projections should include detailed estimates of revenues, expenses, and profits for the next few years. These tools can help small business owners to secure funding by demonstrating the viability and potential of the business.
Tax Implications: Each funding option has its own tax implications, and small business owners should be aware of these before deciding on a funding option. For example, some funding options may be tax-deductible, while others may be subject to certain taxes or fees. It's important to consult with a tax professional or accountant to understand the tax implications of different funding options and to make sure that the business is in compliance with all applicable tax laws and regulations.
Repayment and Default: Repaying a business loan or credit and the consequences of defaulting on such a loan are important things to consider when sourcing business funding. It's essential to understand the repayment terms of any credit or loan, including the interest rate, the repayment schedule, and any fees or penalties. Small business owners should also be aware of the consequences of defaulting on a loan, including the impact on credit score, the legal implications, and the potential loss of assets. To avoid these risks, it's important to carefully evaluate the ability to repay the loan before applying and to make sure that the business has a solid plan in place to manage and repay the debt.
The final say on how to raise funds for your small business
I hope you’ve read this and picked up a financing method that you think would work perfectly for your small business. Traditional bank loans aren’t the only way to fund your business and alternative finance shouldn’t be disregarded. As long as you’ve done your research, you’re not taking big risks with financing you can't repay, and you always read the small print, there’s no reason why alternative business finance can’t be the ideal route for you.
To learn more about these finance options and more, check out Choice Business Loans. If you’re not sure which option would work best for you, they can help you decide.
Before you go...
Funding your business is just one part of running your own business. You'll also need to pay taxes, deal with invoicing (and annoyingly, late invoices) and create branding for your business. There's a lot to think about, so these articles for further reading may just help:
- How to be tax ready when self employed
- 3 important things to consider when starting a self-employed business
- How to deal with unpaid invoices when self-employed
- How can I create my own logo?
And don't forget about business insurance for freelancers and the self employed if that's the route you're taking!