Tax & admin · 30 November 2015

A look at the different business funding options out there

The options out there for small businesses are growing every day
The options out there for small businesses are growing every day

There are a myriad of choices when it comes to funding and the range is growing all the time. The type you opt for will be dependent on which stage you’re at in the growth cycle – a small business will likely be after funding for different reasons than a high-growth firm.

Below, I’ve outlined a selection of the business funding options you have, to help provide a look at the current funding landscape. It is by no means exhaustive and definitely a rapidly evolving scene, but here are some of the more popular options, along with when they tend to be used.

From bootstrapping to family shareholders

Using your own funds:

The starting place for many firms is bootstrapping – using your own funds. Investing savings is low cost for a business owner; you won’t pay any interest after all. It is, though, important to be aware of the risks and make sure you know exactly what you are able to put into the business.

There are far too many horror stories about new business owners putting their house on the line, and everything going very wrong. If you do start off bootstrapping, set a budget and know your limit from early on – you need to make sure you look after yourself as a priority.

Investment from friends and family:

The other frequently used early option is investment from friends and family, whether as shareholders or providing a loan. This can be a great initial source of funding, though mixing business and personal relationships can be difficult to navigate, and it is worth considering what problems may arise from relations or friends investing beforehand.

Borrowing from the banks and alternative lenders

Debt:

Debt financing involves borrowing cash from a lender at a fixed rate of interest, and set maturity date. The banks used to be the go-to option here, but we’re now seeing the rise of alternative lenders aiming to unsettle the established names – with many focusing on providing for small businesses specifically.

This type of funding tends to be split into long-term loans from a bank – a good example being when you might need to buy a large asset, and short-term ones, which could be something like a business credit card.

Government help and outside investors

Start Up Loan:

The government-funded Start Up Loan scheme aims to provide advice, loans and mentoring to new firms. Through this, you can apply for a loan, with the potential of borrowing up to £25,000 if you haven’t been trading for longer than two years.

Grants:

There are some excellent options in the way of grants, and it is worth checking the government site to see what could be relevant for you and your business. They are often for specific purposes – for example, city-specific grants for businesses aiming to improve shop fronts or town centre premises are available across the UK.

Investors:

There are many different sources of funding here, with this option allowing you to sell shares and use the money to finance growth. Angel investors use their own money, if you opt for crowdfunding you offer your equity to the public, while VC investors tend to be focused on high-growth prospects.

Short-term business funding options

Invoice financing:

Invoice financing can be a helpful short-term easing of cash flow troubles, with a third party agreeing to buy unpaid invoices for a fee. Invoice financiers can be independent or part of a financial institution or bank.

There are two types within the UK – factoring, usually involving an invoice financier managing your sales ledger and collecting money owed by your customers, and invoice discounting whereby the invoice financier lends you money against your unpaid invoices and you have to pay them a fee.

Hire purchases:

If you need an asset, you could consider looking at a hire purchase, where you agree to pay for all (or part) of what you’ve bought in installments. You don’t take ownership until the end, and there is the interest element to contend with too. It does, however, allow businesses to control assets without a huge drain on working capital and fixed-rate funding makes budgeting easy, with a clear plan of future expenditures.

Trade credits:

This can be an essential tool for financing growth if agreed with suppliers, and can help lessen pressure on cash flow. It is extended by suppliers to let you buy now and pay later. In any situation, you take delivery of equipment or other valuables without paying cash then and there, as you are using trade credit.

It is often more difficult to do in the early stages, as suppliers will want to establish you can pay your bills on time. But having an up-to-date, well prepared financial plan can go a long way in helping you negotiate here.

If you do start using trade credits, you need to make sure planning goes into it beforehand to avoid unnecessary costs from forfeiting cash discounts or worse, damaging your relationship with your supplier if you do not adhere to the agreed trade credit terms.

Any good business owner will assess the business funding options out there from the off and be savvy enough to look at getting the best ones in place alongside one another, depending on your needs. What you’re after will be constantly evolving as your business does too. Strong forecasts will be helpful in showing what you need and when, particularly if you need an overdraft or a loan – which need good planning in advance.

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ABOUT THE EXPERT

Simon Arnett is a chartered accountant at KPMG specialising on working with startups and small businesses over a range of sectors. His focus is on using his time to help businesses grow and he believes that getting the right funding at the right time is a vital part of the growth journey for every business. Arnett's goal is to make sure businesses are aware of the right options and how to access them.

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