Bank loans
Probably the most common type of funding is loans from banks. Loans can be a good source of finance for businesses, as they’re usually for a fixed time and have a fixed repayment amount each month, which helps with cashflow planning. You’ll typically need to submit a business plan to the lender to prove your business is viable and that you have a strategy for repayment and growth.
Unsecured business loans are designed for businesses that don’t have assets such as property or equipment to offer as security. This type of loan is good for new businesses without collateral, however, interest rates may be higher than secured loans, and a personal guarantee from a director (if you are a limited company) may be needed.
Secured loans tend to be cheaper than unsecured, and they’re backed using the equity in assets owned by the borrower. They’re good for borrowing larger amounts and are easier to obtain than unsecured loans if you have a limited credit history. Depending on the amount needed, a personal guarantee may still be needed, and non-payment of the loan could result in the loss of business assets.
Asset finance
Asset Finance companies specialise in providing funds for companies to buy assets for use within the business, such as brewing equipment and vans. Asset finance can be good for a company’s cash flow as it means you don’t have to find a large sum upfront to buy equipment; in essence, the finance company buys the asset and leases it back to the business. This can be more expensive than buying the equipment outright and you may not be able to cancel an agreement once you’ve entered into it. Asset finance companies will also look at purchasing your book debts, allowing you a proportion of funds immediately rather than waiting for the customer to pay.
Selling a stake in the business
If you are comfortable with selling a stake in your business, you can find an investor or develop a crowdfunding campaign. Raising finance through an equity sale can work well for many business owners: you won’t have to make repayments as you would if you took out a loan, although profits have to be shared with the investors. Remember, though, that you’ll have responsibilities to shareholders, including consulting with them before taking major decisions, so this may not suit every owner, in particular those that don’t want to lose ultimate control of their business.
Crowdfunding
Crowdfunding is becoming extremely popular amongst many companies, enabling them to invest in their growth. Not only does crowdfunding help you raise funds, but it can also give you access to a large number of shareholders who can help you raise awareness of your products (and hopefully buy some as well).
Crowdfunding companies such as Crowdcube and Seedrs have helped many businesses raise funds and awareness, but running a campaign means around two to three months of work, setting up the campaign and then raising the funds, usually in a 30-day window. Look out for costs: crowdfunders will charge up to 7% of all funds raised through their site. Also, unlike a bank loan, you will have shareholders who may want to be kept up to date with trading performance.
If crowdfunding doesn’t appeal, either because you don’t want to run a campaign or don’t want to deal with multiple investors, then finding one or two investors may be a better option. Most areas have an association of business ‘angels’ that you can make a pitch to. Raising finance in this way is not just about the money, it can be a great way of bringing on board someone with skills that you may be lacking in the business (such as finance or marketing).
Grants
Finally, although scarcer than a few years ago, there are still grants available for helping companies grow. Many Local Enterprise Partnerships will offer cash grants alongside private funding. For example, if you wanted to purchase new equipment for £50,000, your local LEP may give you a grant of £10,000 leaving you £40,000 to find from other sources such as a bank loan.
In general, when looking at raising funds, review your business plan and only borrow what you really need as outlined in your plan. This assures you keep a disciplined approach to your business and demonstrates you are credible to lenders and financiers.
