Are you ready to set up a small company or a startup? Have a revolutionary business idea? Quit your day job, launch your business and be your own boss. The next thing to consider is the funding source for small businesses to grow and operate in the UK.
Small business owners have several funding options to upscale and grow their businesses in the current market conditions. From traditional bank loans to investors from capital firms are ready to fund you if you have a successful business plan and significant opportunities in the future.
This guide will help you understand different small business funding sources for growth.
Why do you need to look for funding sources?
As a small business owner, your focus has always been to build sales, keep profits, and perform well. However, you need to consider how to develop your business and lock in growth.
The UK government offers the Growth and Improvement Service to businesses aiming to improve and grow their business. The organisation provides straightforward and practical guidance focusing on critical areas like finance, improving cash flow, marketing, training staff, attracting new customers, and business growth planning.
But, business growth needs funding. It can be to purchase more equipment, hire employees to increase production, set up a new office, etc. Therefore, start looking for different options for small business funding uk. You must have a strong business strategy and the ability to communicate your business prospects to attract investors and other funding sources.
What is the first step in funding your business?
In most cases, owners want to invest their personal savings into the business, which is reasonably practical and easy for small businesses. You don’t need a great business strategy, good credit score, run behind others to convince them into investing, or a loose percentage in your company with personal investments.
However, ensure you have a different business and personal bank account to keep track of your funding. Be careful about the risks associated with investments in your company and whether you are ready to take failures. If your budget doesn’t keep your head above the water, you have other funding sources to try.
You can also raise funds by calling upon your friends and family. However, you need to be aware of the risks of taking funds from closed ones. Money can bring problems between friends and hamper personal relationships.
Credit: Driven Insights
Different business funding sources
Starting a business and maintaining a constant line of operation is not sufficient to meet more significant goals. You need to look for funds to upscale the company by
● Either borrowing money now and repaying later,
● Or seek funds by selling equity shares of your business.
Your funding sources may include the following:
1. Bank loans
You can always apply for small business loans in almost every high-street bank. The loan amount generally ranges between £1,000 and £50,000, with a flexible repayment period. However, you need to research different types of loans, their repayment periods and interest rates.
Before applying for a bank loan, ensure you have a business account, an excellent convincing business strategy, precise sales projections, cash-flow forecast, and tax return. Otherwise, the bank may reject your application, further affecting your credit score.
Advantages: Banks can provide loans at low-interest rates depending on your credit score. Additionally, you don’t have to give up control over the business.
Disadvantages: Applying, approving, and getting loans is tedious and time-consuming.
2. Government Startup Loan Scheme
The Government introduced the Startup Loan Scheme in 2012 to encourage entrepreneurship. Owners can apply for government-backed personal loans ranging between £500 and £25,000 to expand their business. The repayment period for the scheme is one to five years, and you need to pay a fixed interest rate of 6% per annum on the loan amount.
Prepare a detailed business strategy and cash flow forecast to prove you are eligible to afford the loan’s monthly repayments. Additionally, you will get a business mentor for 12 months on acceptance of your loan application.
Advantages: You can get up to £5 million, and the Government promises an 80% partial guarantee against the outstanding facility balance, lower fees and interest.
Disadvantages: There are strict conditions on eligibility for such government loan schemes.
3. Small business grants
The Government’s small business grant funding options allow small businesses to apply for grants to cover certain expenditures, like machinery, IT equipment, premises, and plant costs.
They have different application processes and qualification criteria for each grant; you will only get approval if you are eligible. These funding options are the Prince’s Trust Enterprise Programme, the Seed Enterprise Investment Scheme, the Enterprise Investment Scheme, Social Investment Tax Relief, Innovate UK Smart Grants programme, the Community Investment Tax Relief, and others.
Advantage: You don’t have to return the money.
Disadvantage: Several small business grants have limitations like demographic restrictions, geographic changes, and economic climate. It means a grant in London may not be available for owners in Ireland.
4. Peer-to-peer finance
Small-scale investors match up with small businesses looking for funds in the case of peer-to-peer lending options. There is no intermediary; you apply for investment online and receive a loan from the investor’s cash pool which is expecting a better return on their investment.
Applying for these finance options is easy. You can borrow funds ranging between £1,000 to £1m or more and have repayment periods similar to bank loans. You need to discuss the interest rates with the investor before borrowing money.
Advantages: The process is simple and easy.
Disadvantage: The usual debt rules apply if you fail to repay.
5. Angel investors
These are high-net-worth individuals ready to invest in your company at its early stages and are often known as “seed” funding. They can support up to £1m or more in exchange for a share of your company.
You may prefer a one-to-one investor approach, but looking for an angel investment network for startups and small businesses is good. Ensure you have a face to face meeting with these investors and clear up all your queries.
Advantages: Besides cash, angel investors share their experience and provide valuable business advice and guidance.
Disadvantage: You will no longer retain 100% ownership of your business.
6. Venture capital
Look for a venture capitalist who is ready to invest a considerable amount of money, more than that of an angel investor, in exchange for equity in the business. They help companies grow quickly to get a good return on investment within a short time.
Venture capital funding is excellent if you’re confident with your business and expect a high growth potential. It not only secures your funding but also provides necessary mentoring.
Advantage: Besides funds, they offer expertise for quicker business growth and allow you to use their contacts.
Disadvantage: You may give up a large part of your business in return for a significant amount of funds.
Crowdfunding is one of the most popular funding options in the UK, leading down various platforms providing different investment models. It allows small businesses to secure funding and generate publicity. It is suitable for companies with high growth potential to attract attention.
For product-based businesses, consumer-focused crowdfunding is recommendable as it ensures a healthy number of guaranteed sales before you start manufacturing the products.
If your business is not product-based, you can raise capital with investor-focused crowdfunding, where your supporters turn into shareholders.
Advantages: You can generate more funds when you reach a greater pool of people. Also, you don’t lose your shares in the business.
Disadvantages: It is time-consuming and requires effort to gain publicity.
When seeking funds for your business, looking into cost and convenience is not just enough. You must consider how the solution will fit your long-term goals and whether you are ready to take risks.
For small business funding options, you can either borrow or seek investment. Borrowing money means you have complete control of your business, but repayments can be a burden that slows down your growth. In contrast, the investment provides a lump sum amount of cash into your business that you don’t have to repay, but you lose a share of your company to stakeholders. However, with investments, business growth may proceed more quickly.
Talk to professionals who can advise you on the best funding options by considering your business circumstances.