What are the Finance Options to Help Grow my Business?

You’ve been running a little while now, learnt a lot of lessons and had some very late nights and you feel it’s time to take your business to the next level. You won’t always have the cash in the bank or the revenue from your customers to get you there so you may need to source finance. We will go through the basics of the different types of finance and varying sources you can get money from in this article.

1. What are the different sources of finance to help my business grow? 

Bank Finance. The clue is in the name with this one, you can apply to your current or other banks for finance. You will be required to show detailed financial records, present what you plan to do with the money and may be refused.
Alternative Debt Finance. Born out of the last financial crisis, the requirement to have alternative sources of debt finance boomed as SME’s, in particular, need easier methods of sourcing funding. This form of debt often involves less paperwork and the time to complete is usually quicker than bank finance. In return, business Directors’ are often required to provide Personal Guarantees and interest rates are usually higher.
Equity Finance. This is when you give away a proportion of your business in return for money. This can be done publicly or privately, through individuals or firms.
Government and Public Initiative Grants. You won’t have to repay this money but there will be specific criteria you will have to meet. Grants will usually not cover the entire cost of a project and/or growth plan.
Crowdfunding. You will be asked to put a proposal together which will be shown on the crowdfunding platform. You will be required to give something to the investors in return for their investment and this usually increases depending on the amount of money an individual contributes. For example, someone that contributes £50 will get early access to products and some that invests £500 may get a hamper of all your best products. You will also have to give all the money back if you do not hit your initial stated target.

2. What is the difference between equity and capital? 

This may seem obvious but it is important to ensure that you have your terms straight when deciding and discussing with potential investors. Equity describes the control over a stake/number of shares in the business. When investors or firms ask for equity in your business this could be a percentage with you remaining in control, a controlling percentage of the business as a whole or they may want to buy you out completely. Capital refers to the introduction of investment either from existing Shareholders/employees or via external parties. This can take the form of debt or equity.

3. What are some terms to know when looking to finance the growth of my business? 

Equity capital – you are selling a share in the business to the investor and sometimes they will be become an adviser to the business. They will use their expertise in industry to help with top line strategy because the more money the business makes, the more money they make.
Debt growth capital – this is where you take out loans to fund your growth plans and don’t relinquish any control over your business.
Working capital – this is the money you have/need to fund the day-to-day running of your business. It is not used for growth plans.
Growth capital – money you have/need to grow the business in any form, for example, loans, debts etc.
Venture capital firms – these firms will be interested in investing in new start-ups with massive growth potential.
Growth capital firms – will be interested in investing in more mature companies that can see the potential of their growth plans.
Private equity firms – a leveraged buyout, they will be interested in getting the controlling stake of the business.
Public equity – by floating your business on the stock market you will receive money for shares in your business from the public.

4. How do I write a pitch to attract external finance? 

This is where your trusty business plan will come in. You may need to write a couple of different versions to use in your pitch depending on who you are talking to. Government grants will have different interests to private investors or banks. Identify what would make your business most attractive to the audience you’re presenting to and adapt accordingly. Have all your facts and figures to hand and know them inside outside. Practice your presentation and have an elevator pitch ready for those chance meetings with valuable connections or potential investors. Go to your local business growth hub for advice, they will be help you to organise and write your proposal, make you aware of any grants available to you and potentially point you to private investors.

Funding Options for Your Business

Finding The Best Option 

There are a multitude of options available when it comes to financing your new business idea, either as a sole trader or as a limited company. You can choose between business bank loans, loans specifically for start-ups, personal investment, peer-to-peer lending, equity investment, crowdfunding or asking your family and friends if they have the means to help.
Ideally the best funding option is the one you can afford to pay back and has good repayment terms, provides enough for your project and you overall feel confident and comfortable about it. There is no universal ‘best option’, you need to find what would work best for you.

TYPES OF FUNDING 

Personal Investment 

Putting your own money into your business can be an easier and faster way of seeing your business idea come to life. This is applicable whether you plan on operating as a sole trader or as a limited company. However, it is also a test of your confidence and commitment to your idea. While this does not require an application or business plan, it is recommended that you have one to ensure you have thought it through.
Some drawbacks to this are; you might not have as much money to invest into it compared to getting a loan or a grant, and the money you put in might be your emergency savings. This could impact you in the long run, as well as change your lifestyle and day to day budget.
Always keep your business money separate from your personal finances, evaluate the risks thoroughly, be careful not to lose assets in the worst case scenario and know what the limits are.

Friends and family 

If you don’t have the personal means to invest into your business, you might have thought about asking your friends and family. However, the key thing here is to be careful not to affect and deteriorate your relationships in the process. For this option it doesn’t matter if you would like to be self-employed or operate as a limited company.
Always be honest and clear about how much money you need and what the repayment plan would be and make it formal by putting things in writing. This would help you avoid misunderstandings in the future.

Business loans 

Banks might be willing to lend you money for your business. However, many are wary of new businesses and self-employed ventures and would much rather prefer lending to an established limited company. To apply for a business loan you would need a detailed business plan, sales and revenue projections, a cash flow forecast and accounts and tax returns.

Start Up Loans 

If the banks refuse to lend you money for your new business, you can always have a look at start up loans. They are aimed exactly at new entrepreneurs that have been trading for less than two years and are given to both sole traders and limited companies. Additionally, they are supported by the Government, allowing you to borrow between £500-£25,000 over one to five years. These loans are provided by the Start Up Loan Company and its delivery partners throughout the UK. They can also help you write a business plan, prepare your financial projections, while also offering financial advice & mentoring.

Peer-to-peer lending 

Peer-to-peer lending works just like a regular loan but the main difference is the money comes from individuals that have invested their money into the scheme. Usually P2P lenders are online only and might offer lower overheads and good interest rates.

Business grants 

Depending on the type of business you have, you might be eligible for business grants. If your company would meet an urgent demand, solve a problem, or improve social mobility, you might be eligible to apply and receive financial help. They are highly competitive and you need to research where to get it from as it might be offered by the government, your local authority or local growth hub.

Equity Investment 

In the case of equity investment, business angels or venture capitalists offer financial investment in exchange for shares of your company. You would also benefit from expertise and industry contacts, in addition to the money. To attract investors your company should have the potential to grow in the future and deliver good value for the investors’ money. One drawback is that you might not end up the only decision maker in the company and that you might have to share its control.

Crowdfunding 

Crowdfunding is when people need money for their business idea and turn to the online sphere and other people for help. There are platforms specifically for this where almost everyone can advertise their business idea and plan. However, only a few are successful when crowdfunding, especially that you need to raise all the money you requested or you risk getting none of it. Success also requires you to build an audience or a community and to offer them gifts or the product when the campaign ends.