You may need finance to get your business started, or seek an injection of capital further down the line once your business has grown. Here, we look at how most small business owners raise funding.
Friends & Family
Many small businesses get started with help from friends and family. With institutional lending at an all time low, this is more the case than ever. Whilst borrowing from people close to you definitely has its advantages, you should always record any transactions on a purely business basis, to minimise any complications down the line. Any business agreements you make should be written down, and you should seek legal advice where necessary.
Credit cards and personal loans are another frequent source of initial funding for new businesses. In fact, a recent PAC report found that overdrafts aside, credit cards were the most popular form of borrowing for SME owners. Of course, you are personally liable for repaying any credit card balances, as your personal liability is not limited.
Business Bank Loan
A Kingston Smith study into the finances of small businesses found that start-ups “would do almost anything” to avoid having to approach a bank for lending. In reality, however, if you’re unable to fund your business using your own resources, a bank loan could well be the most realistic alternative.
Rather than being a source of funding itself, invoice financing (or factoring) frees up the value of your outstanding invoices in exchange for cash. It can be a very useful way to free up your company’s cashflow, in exchange for a flat percentage of your invoice value. The factoring company will often take care of late payment issues on your behalf – often one of the biggest causes of stress for small companies. Find out more here.
If you are seeking to expand your business, you may seek more substantial funding at some stage in the future. If you are lucky enough to know, or meet, a high worth individual who has a shared interest in your vision, you can not only benefit from the capital they can provide, but often the experience and expertise they can offer your enterprise. Again, it is crucial to get legal advice before entering any type of arrangement with a third party, to ensure that your interests are protected. Find out more about angel investors here.
Alternative Funding Options
In recent years, a number of niche funding methods have emerged – including ‘Crowdfunding’, whereby a large number of investors (often via the Internet) pool their resources to launch or fund a business idea.
For more background information, try our new guide to crowdfunding.