How to fund your small business
You've come up with a market changing idea, you have the business plan in hand, and now you're ready to look for funding. But you stop to ask yourself; how do small businesses' get funding in an increasingly competitive small and medium-sized enterprise (SME) market? Thankfully, as the number of UK based small businesses has increased over the past five years, so have the funding options available to them.
My favourite form of funding is bootstrapping. Spending little while making sales is the best way to test your product and build confidence in the business model. Bootstrap your business by keeping hold of the day job and starting the business at nights and weekends – that way you hold on to the security of a salary while finding your feet in self-employment.
Rather than take on pricey office space, base the business at home, and if you do need any equipment or space to get started, try to beg, borrow, and barter your way to success. For instance, approach people who have the assets you need and ask if you can use them for free by highlighting the resultant benefits to the owner, such as helping them attract new customers through brand promotion.
While bootstrapping is a particularly useful funding method for new businesses, the high productivity mentality it creates can be useful when maintained throughout your business journey.
Start up's Government Grants and Schemes
The government offers financial support to start-ups and growing businesses through the British Business Bank. For start-ups, there's Start Up Loans which is a personal loan, up to an amount of £25,000 per director in the business, repayable at an interest rate of 6%. As well as the loan, you also get access to a mentor and corporate offers.
For growing businesses, the government has provided funds to companies such as Funding Circle and Notion Capital who lend larger amounts of money. To check if there are grants available in your area, visit www.j4bgrants.co.uk. Just bear in that mind that accessing a grant can depend on your sector, stage of growth, and regional location.
Borrowing funds from a bank, or online from investors, is one of the most common funding methods for small businesses. Just make sure that you know, and can meet, the terms of repayment before you borrow any money.
The major high street banks are in the market for lending, with HSBC having recently announced a £10bn fund for SMEs. What the banks will want to see is a business plan showing how you intend to spend the funds, and then how you intend to pay back the loan.
Alternative sources of lending exist including Funding Circle; they are a lender who allow small businesses to borrow up to £500,000 while also offering the added bonus of having the money in your account within days. Small businesses are also borrowing from working capital lenders such as iwoca who offer flexible credit, thereby providing small businesses with the working capital to take advantage of new opportunities.
Crowdfunding has been a huge enabler of enterprise with thousands of small firms deciding to take their project to the crowd, not only to raise funds, but also to increase brand awareness. Major platforms such as Kickstarter, Crowdfunder, Seedrs and Crowdcube have enabled businesses to make their pitch and ask the crowd to invest in the company (equity crowdfunding), lend to the company (loan based crowdfunding), or back the business in exchange for a reward (reward based crowdfunding).
The secret to success is in preparation. While preparing a strong pitch is important, you should also aim to have backers lined up before you go live with your business as people are more likely to fund a project if they can see there's appetite for the final product. This approach has worked for companies like Oppo ice cream and Version22 who hit their project target of funds and now have hundreds of investors and fans who talk about the business they backed.
When it comes to the question of raising funds by releasing equity in your company, think carefully. Think about how much money you need to raise, on what this will be spent, and with whom you can work over the long term! Equity investment can come from angel investors, for whom you will need to have the company registered for Enterprise Investment Scheme relief, or corporate accelerators and venture capital companies. Regardless of the route you choose, opt for the partner who can offer funds plus industry experience. Having an equity investor in your business is a partnership and you'll need to feel confident you can form a positive working relationship.
Small business insurance
Finding a suitable funding option is vital for small business owners; however considering the potential financial outlays is equally important. Purchasing small business insurance can often feel like a secondary task when starting a business, however, the cover that it offers can prove vital for insuring your business from large financial losses.
It's important for business owners to ensure they have an adequate level of public liability insurance so they should take into account the type of work and activities undertaken, and locations that they work at, when selecting the appropriate limit of indemnity.
There's one thing that's common across all these forms of funding and that's the need for ample preparation. Engage the services of an accountant who can help you prepare a business plan, including a cashflow forecast, so you know with confidence how much you want to raise, and on what this will be spent. Raising money can provide a boost for the business but should be entered into with care and preparation.
Emma Jones is founder of Enterprise Nation – supporting people to start and grow their own successful business.