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The main sources of funding for new companies

A major new study published by a leading accountancy firm shows that the vast majority of start-up companies use their personal resources to get their businesses off the ground, and will only seek bank lending as a last resort.

Study into what makes a successful small company

The research – ‘triggers for SME success’ – undertaken by The Surrey Business School on behalf of Top 20 accountancy firm Kingston Smith, included responses from over 1000 small enterprises across the UK.

All of the conclusions make perfect sense; successful small companies monitor their cashflow, and successful company owners are more willing to seek external advice.

Direct referrals are by far the most important type of customer or client for businesses of all sizes – and search engine optimisation is now the second more important source of new leads.

Sources of funding for small companies

The study found that small companies were far less likely to seek external sources of funding during the early days, with over 70% using their own savings to get started. Other sources of personal funding include: credit cards, loans from family and friends, remortgaging, or using income from other sources.

Fewer than 30% of respondents secured a bank loan to establish their businesses, and 9% used angel investment capital to get started. Other minor sources of initial funding included leasing and invoice financing.

The study found that start-ups would do almost anything to avoid having to approach a bank for lending, with the general attitude of businesses involved in the survey ranging from “disappointment to contempt”.

What about contractors and freelancers?

Most contractors start in business with a view to securing contract work immediately, or do so once they have already found a suitable contract. In most cases, contractors do not need initial funding to start contracting – aside from administrative costs.

However, the same business fundamentals come into play as they do with other types of limited company – ensuring that there is a steady stream of contract or freelance assignments to generate cash flow for the business, and chasing up late payments.

The main challenges come when job opportunities are more scarce. Rather than adopting a ‘feast or famine’ approach to freelancing, the general consensus among seasoned contractors is that you should aim to save enough funds to maintain your normal lifestyle for six months if you are ‘on the bench’.

Download the report

You can download the PDF report from the Kingston Smith website here.

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