20.9.2021

Sources of Finance and Funding for Small Businesses

Written by Aine Hendron

funding

Navigating business finance can be extremely challenging, especially for start-up companies. Many new entrepreneurs will underestimate the amount of money required to cover the cost of opening a new business and running it for the first few months. Rather frighteningly, 79% of business failures are due to starting out with too little money [1].

Once you have the start-up costs and cash flow projections for your new business crystalized through your business plan, you’ll have a very close estimate of exactly how much funding you’ll require. Here are some sources of finance for small businesses for you to consider. 

Small business loans

Every loan process differs depending on the lender and borrower. Some lenders require a business plan before they offer payment, typically expecting that it’ll be used for branding and marketing, new point of sale (POS) software, or finding new employees. Other lenders understand that your loan may be used for other things, such as paying off debts, unexpected business expenses, emergency repairs, and investing in trades and stock. 

When seeking financing, you might be tempted to accept the first offer that you receive. However, it’s important to shop around in order to agree on the best terms for your business. After all, a loan is a two-way transaction. You’ll have to iron out a few specifics when taking out a small business loan

  • The amount of money you’d like to borrow
  • Whether you need a long term or a short term loan
  • The interest rate of repayment 
  • How repayments will be made, and how frequently?

Secured bank loans usually require a guarantee that repayments will be made or you’ll risk losing ownership of business assets for collateral, the business premises or vehicles, for example. If there are no assets tied to the business, lenders might ask for a personal asset for collateral, such as the owner’s house. Taking note of the policy surrounding late or missed payments is important too. Most businesses will take out a loan in good faith that they’ll be able to repay, however, it’s good to understand the risks in case something does go wrong.

The greatest benefit of a small business loan is that loans are temporary and often come with fixed rates. Unlike investments, where money is invested in exchange for a portion of the business, once a loan is paid off, there is no more obligation to the lender, giving you better control of your business than you would have if you involved other business members, shareholders, or investors. As well as this, many loan services include expert support and guidance from experienced advisors who will provide the assurance that you’re getting the best value from your loan.

Small business grants 

Grants are occasionally available for small and start-up businesses that meet certain criteria. You might be eligible based on the industry or sector you work in, the size of your company, your business location, or even the date that you’ve established your business. Sometimes there are grants available due to extenuating circumstances, as we have recently seen with the COVID-19 pandemic. 

Some governments, local authorities, or private organizations provide funding for businesses that are trying to grow in a certain direction. For example, the Irish government recently launched a scheme for SMEs who do not currently have a website, allowing them to invest in website creation and maintenance. As many EU countries have committed to creating a greener future, some governments have launched schemes to help businesses become more environmentally sustainable

The best thing about a grant is that it’s essentially free money that doesn’t have to be paid back. However, it is important to remember that there can be very stringent criteria, and sometimes the lengthy application process doesn’t always follow through. If you are eligible, you might be limited to spending your grant on very specific things. So, a grant isn’t always the most reliable source of finance for businesses that need flexibility with their finance. 

Family and friend loans

You might be surprised to learn that one in four businesses are unable to access the funding that they need for their startup [2]. For this reason, looking to your inner circle to provide some initial capital can be a great solution. Family and friends may be willing to provide a loan or to buy some shares in your new company to help with early cash flow problems until your business is generating enough revenue to balance costs.

An added bonus of borrowing from friends and family is that it’s unlikely that you’ll have to pay any interest on your loan. However, investing in a friend’s business is extremely risky from the lender’s perspective, and could undoubtedly lead to tension and disagreements. For mutual protection, it’s best to keep a written record of the loan or investment agreement, including the loan amount, repayment terms, security agreements, and the length of the loan with fixed dates. 

Crowdfunding 

Crowdfunding isn’t as simple as the name implies. In one sense, crowdfunding can refer to a range of sources coming together to raise donations or lend money to a business. It’s different from typical funding options as this finance is a collation of donors, rather than a sole lender. There are multiple different crowdfunding models: 

Donation-based crowdfunding

Individuals donate small amounts to meet the larger funding aim of a specific charitable project while receiving no financial or material return.

Peer-to-peer lending

A group or crowd lends money to a company with the understanding that the money will be repaid with interest, similar to a normal loan. 

Equity crowdfunding

The sale of a stake in a business is sold to a number of investors in return for money. Equity crowdfunding is similar to how common stock is bought or sold on a stock exchange.

Rewards-based crowdfunding

Individuals donate to a project or business with expectations of receiving in return a non-financial reward, such as public recognition, free goods or services, in exchange of their contribution [3].

An added benefit of crowdfunding is the attention and social awareness that it brings to your business. It doubles as marketing, and drives sales in advance in exchange for funds. 

Business credit

There are three principal business credit lines: personal guarantees, revolving credit, and installment loans.

Personal guarantees

If your business fails to pay back its debt as agreed, you will be held personally liable. Making a personal guarantee means you agree that you’re willing to surrender your personal assets savings if your business can’t repay the loan.

Revolving credit

Revolving credit gives your business a set credit limit, very similar to a business credit card. Once you repay the balance, you can continue spending up to your limit again, and the cycle repeats as long as you pay back what you spend. They’re usually quite flexible, in that there’s often a minimum monthly payment required, rather than the full amount spent. 

Installment loans

Commercial installment loans allow companies to borrow a fixed amount of money and repay a set amount, over an agreed period of time. These usually have fixed interest rates that don’t change over time, keeping repayments straightforward. 

Responsible financial lenders

These organizations specialize in lending affordable finance to companies that are unable to be supported through mainstream lenders such as banks [4]. These investors are often wealthy individuals and entrepreneurs who provide business mentoring, advice, and instructions, depending on how much funding they provide or what stake they share. 

Venture capitalists

Venture capitalists (VCs) are professional investors responsible for investing and growing some of the world’s most innovative companies, including Facebook, Spotify, and Airbnb. Since VCs invest large sums of money (typically over £1m a business), they expect a solid business plan and accounts, as well as a clear exit plan in the form of acquisition or stock in shares [5]. 

Venture capital, also known as private equity, is geared towards already established businesses that wish to expand rather than start-ups.

Angel investors

Business angels are private investors who invest in startups and small companies in exchange for an equity stake of 10-20%. The investment amount ranges from £5,000-£150,000, and there’s no obligation to pay back the investment if the startup fails [6]. You’ll be familiar with the concept of angel investors if you’ve ever watched Dragon’s Den or Shark Tank. 

Asset finance and leasing 

These sources of funding let businesses finance equipment needed to operate the business through regular repayments. Asset leading is positive because it encourages a healthy cash flow and also comes with tax benefits. 

Asset-based lending and refinancing

If you’re struggling to meet loan payments on a particular asset that you already own, you can sell this asset to an asset finance company for a lump sum. You’ll then lease the asset from the provider over an agreed period. This can help businesses source between £1,000 and £10,000 in financing over the course of a few years.

The value of your assets will determine the size of the loan you’ll secure. Similar to a mortgage, businesses typically undertake asset-based loans by putting up physical assets as security to gain access to a loan from an asset finance company [7].

Critical investments

When building a business, you’ll need strong foundations to support your growth. Point of sale (POS) systems work as the backbone of retail and hospitality businesses. Designed to work as a complete business management system, you can control all vital aspects of your company from one cloud-based system.

Receive detailed analysis on the areas that matter to your business:

  • Sales reports filtered by product, time, trend, or employee.
  • Inventory reviews including profit margin, profitability, trend detection
  • Multi-award-winning inventory management that syncs online sales and in-person sales for the most up-to-date stock levels.
  • Automated orders that purchases stock once it falls below a certain level.
  • Customer management systems that save customer contact details and shopping preferences for more targeted marketing. 
  • Integrations with over 100 apps including marketing, accounting, bookkeeping, and loyalty program apps.
  • Employee management for more efficient scheduling and payroll. 

If you’d like to learn more about our industry-leading software, request a free callback with one of our experts.

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