When you launch a new business, there will be a period of time where you will have to finance your venture before it becomes profitable. Here, we look at 10 funding methods used by small business owners, and we consider the pros and cons of each one.
Most small businesses rely on personal funds to get started. Although there is always risk involved when you start a new business, if you rely on yourself, you have no obligations to anyone else, particularly a commercial lender. Make sure you have some contingency funds in place, as things very rarely go exactly to plan, and it’s always best to be conservative with cash flow forecasts.
Borrow from friends or family
Another popular source of initial funding is proved by friends and family – people who you trust, and who want to see you succeed. Although it may not seem important when you’re just starting out in business, you should always have a written agreement in place with anyone who injects money into your business. This may just be the terms of a loan, or you may decide to provide shares in your company in return for funding. Take legal advice if you unsure, as you want to avoid potential disputes in the future.
Credit cards are a flexible way of providing short-term funds to help launch a new venture. Take your time to research the market to find cards with a low APR (Annual Percentage Rate), as they vary enormously.
Bank / Start-up Loan
You can either approach a high-street lender, or apply for a Government-backed Start-Up Loan which will provide up to £25,000 per applicant. over 1-5 years. Unsurprisingly, you will need to provide a business plan and cash-flow forecast alongside your application to prove your commitment to your new business, and to reassure the lender of your viability as a borrower.
If your business is eligible, you may be able to secure funding from over 200 Government schemes, which include subsidies and other incentives to start a business is a specific industry or region.
This generic terms covers a wide range of funding arrangements which monetise the value of your existing assets, such as machinery, vehicles, or equipment. You can leverage the value of these assets to release cash or to finance new assets that you need to grow your business. For obvious reasons, this type of funding is most appropriate for established businesses who have built up a number of assets over time – something a start-up firm is unlikely to have done.
One of the main benefits of seeking ‘angel’ investment is that you can secure the funding you require, but also expertise. Taking Dragon’s Den as the obvious example, successful applicants often benefit from the skills of their mentors – which, in many cases, can prove to be more valuable than the cash injection. Find out more in our guide to business angels.
Another source of funding involves taking on equity partners. A venture capital firm will actively seek to take stakes in other businesses which it expects to achieve significant growth in a relatively short period of time. This type of funding is unlikely to be relevant to the majority of small firms, however if you have a serious business plan, impressive personnel in place and a strong USP, read our guide to venture capital for more information.
Somewhat of a phenomenon over the past few years, a number of web platforms have sprung up which allow would-be entrepreneurs to source funding from a large number of individuals at once. Individuals opt to invest or donate money to your business concept, social enterprise scheme, or cause. The fundraising itself is carried out by the online platform, in return for a fee linked to the size of funding raised. Find out more about crowdfunding here.
You many find that you can exchange products and services with other like-minded entrepreneurs, so that no money actually changes hands. For example, you may be able to provide web design skills to a printing or sales company, who help promote your business in return. You may be able to provide services to an accountant, who will look after your books. There are many inventive ways you can build up your business over time by relying on goodwill alone.