How to Get Funding for your Small Business

Last Updated: Mar 21, 2021
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If you have an idea for your own small business, you may be itching to get started. However, the first stumbling block most budding entrepreneurs come across is how they are going to get the money to start their business.

A lot of start-up funding can indeed be difficult to come by, especially if your idea is to start really small and build your way up. Funding options are not as favourable for start-ups as they were a few years ago. But this doesn’t mean that you won’t be able to source any investment at all.

You must think carefully about the type of investment funds you need to get started and what sort of terms and conditions you are happy to accept to get the money.

Where do I start?

Before you even approach anyone for start-up money, you need to do your homework. You need to know your business inside and out so you should start with a solid business plan that makes your visions clear and understandable not only for yourself but for anyone you approach for help.

Your business plan is your foundation document. It should contain and explain five critical points of your business approach and goals.

1: Understand what financing you need to get your business started (do your maths and show your figures).

2: Make a list of people to approach to network with. Asking for introductions from established business owners and founders will create trust with investors.

3: Look for investors that can offer more than money. There are experienced business investors out there that can offer you their time, knowledge, expertise and advice as well as connecting you with their own network of people.

4: Create a long-term plan. This may involve creating a limited company and selling shares in the business.

5: Have the perseverance not to give up.

What to look for in an investor

When you are desperate to get your new business launched, you may be tempted to jump in and accept the first investment opportunity that comes along. Try not to do this because you need to make sure that you and your investor’s goals and visions for your business are synchronised.

You need to be on the same page with each other and need someone to support you that can add more value to your business than simply the money to get you started.

Remember that you could be in partnership with your investor for a very long time, so you need to have trust in each other. If you don’t agree on everything you cannot simply sack your investor like you can with an employee that doesn’t fit their role.

Look for the best fit for your company and if you can find an investor that can bring other much-needed skills to your company, then they will be a better fit for your long term goals.

You may find an investor that can bring a lot of industry expertise that can be really helpful and will to fill a hole in your business structure that you cannot yet afford to cover, such as someone with business accounting or marketing experience and expertise.

Don’t give up if you get knocked back

It can be hard to raise the seed money for your business so don’t be surprised if you get knocked back the first few times. As long as you have confidence in your business plan, you will eventually find someone that will see what you do and will be just as excited about your idea.

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Alternatives to a bank loan

Many entrepreneurs will first look at approaching their bank for a business loan to start up their new business. However, bank loans can be hard to come by, especially when you are starting a brand new business with no history or proven track record.

Other options include equity financing that could be a more attractive proposition for you. Look at schemes such as the SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme).

These are schemes where business investors are given generous tax reliefs to offset part of their investment amount against tax.

Angel investment funding is also an option. These are networks that actively help new start-ups to get off the ground with the money the need. There are many different angel investment networks across different business industries, so you would need to search for angel investment groups to approach that is within your specialist sector.

Other sources of business financing to consider

If you don’t want to dip into your own savings to fund your business, then there are several ways to source the necessary start-up money you need. Here are a few ideas you should look at:

Asking family and friends

If your business idea is something that you plan to get your family involved in, then why not look within your family or circle of close friends for support to get started.

It is not uncommon for friends, parents or siblings to loan you the cash to get your business off the ground in the early stages. This can be useful when you want to test the market to see if your product or service will be a viable option.

Once you have a proven business structure and proof of demand, you can then look at seeking other forms of funding to take your business to the next levels. Many small home business ideas have launched in this way from the kitchen table or spare bedroom.

The pros of asking your family and friends are that you can get a quick source of funding on very flexible terms. Most of the time a small loan to get you started maybe interest-free, especially from family members that want to see you do well for yourself.

The downside is that by mixing close family and friends with business finances can end up damaging your relationship should things go wrong.

Business bank loans

Traditional high street bank loans are still a viable option. However, you need to read the small print and understand the different types of business loans being offered by commercial banks. The terms and interest rates can vary wildly between lenders.

You will have more chance of landing a loan with favourable terms from a bank that you already have a good relationship with. So if you have been a personal banking customer for several years with a bank, they may be more willing to offer you a loan.

The main benefit of a bank loan is that you don’t have to give up any control over your business in exchange for the funding. The downside is that securing the loan can be very time-consuming as there are so many checks and balances to go through.

Crowdfunding finance

A popular method of raising money these days is crowdfunding via the internet. This is where you put out a request for funding from the general public to either lend you the money to get started or for them to buy a share in your business to provide the funding you need.

While it can take a while for your crowdfunding message to spread and to accumulate the target amount, it can be worth the effort if your business idea can attract enough attention and enthusiasm. However, you will need to be prepared to do the legwork to market and publicise your crowdfunding campaign.

Venture capitalists

Whereas angel investment funding is more suitable for a lean start-up of those that want to start really small,venture capital investors would provide a larger amount of investment capital in exchange for equity in your business.

This could be a good route to go down if you have expensive machinery or equipment to finance and you want to get going as quickly as possible.

One of the main objectives of venture capitalists is to help businesses grow rapidly so that they can get back a good return on their investment in the shortest time frame possible. If you don’t mind sacrificing some of your equity in return for funding, then this could be a good option for both the investment you need but also for mentorship to help strengthen your business.

Bridging loans

Often known as ‘payday loans’ you could look at getting a short-term loan to kick off your project. As long as you are confident that you will have the funds available to make your repayments on time, it could be a quick way to get started.

The major downside of this approach is the crippling rates of interest that are applied to these types of loan. If you fail to repay your loan or don’t make your regular payments on time, the costs can quickly escalate leaving you with a growing debt before your business has really taken hold.

Guaranteed loans

Guaranteed loan schemes, like the Enterprise Finance Guarantee, are aimed at entrepreneurs that don’t qualify for business bank loans. Usually, this includes people that want to start a new business but can’t put up any security or have any past trading experience or business record to demonstrate their viability.
If you have been knocked back for a business loan and have tried other financial routes, you may be successful here and qualify for lower repayments if the scheme is supported.

Some strict terms and conditions mean it could be difficult to qualify, so it is worth looking into before you apply to make sure you tick all of the boxes.

Improving your chances of attracting investment

Most of the funding options discussed above will come with some risks that can hinder your plans and goals for your future. You need to make sure you keep a tight reign on your business cash flow, constantly monitor your forecasts and keep on top of your creditors and debtors to ensure your success.

You will also increase your chances of securing formal funding from major sources when you operate as a Limited Company rather than as a sole trader or unregistered small business.

Most lenders will be more inclined to trust and grant an application for finance from a Limited Company because going through the formations process shows a high level of dedication to your business.

It shows that you are taking your business seriously and want to build a credible, open and honest business structure to gain the trust of everyone that you deal with.

Incorporating your business is easy and cost-effective with us. In most cases, we can get your new company up and running within just one working day!

Do not hesitate to contact us to discuss your needs and your plans for your new business. Our expert team of experienced business advisers have more than 60 years of collective knowledge to advise you of the best route forward for your new company.

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