Raising funds for business growth
Why seek funding?
If you have grand plans for expanding your business, you may need additional funding. This might be for something as simple as boosting production, or something as ambitious as buying another company. It may even be simply to improve your cash flow. Whatever your goals, there are various ways to source the necessary finance, each with its own pros and cons.
Borrow from the bank
Almost all high street banks offer small business loans, generally between £1,000 and £50,000 and with relatively flexible repayment terms. Securing a loan can be a challenge, rather like getting a mortgage but even more so, as you need to demonstrate that you are a good investment and will be able to repay. A watertight business plan is a must (with figures and forecasts built into it by your accountant), along with a very clear strategy for how you will use the funding.
If you are seeking funding to buy a business, make your bank aware of the assets you’ll be buying, as these can strengthen your application (since you’ll be borrowing against them). Just remember to include liabilities too.
Peer-to-peer (P2P) lending matches up smaller-scale investors with small businesses looking for funds, cutting out the middleman. You apply online, and get a loan drawn from cash pooled by savers looking for a better return on their money. This type of finance is easy and simple to apply for, and you can borrow as little as £1,000 or as much as £1 million. Repaying a P2P loan is similar to repaying a bank loan, with the interest rate agreed upfront. However, if you struggle to repay then the usual rules about debt apply.
Angel investors are usually high-net-worth individuals who invest in early-stage businesses. It’s sometimes called ‘seed’ funding and you can generally expect to raise anything up to £1 million. Like venture capital, angel investors tend to invest in exchange for a share of the business, so they must believe in your business and in you. Often successful businesspeople in their own right, angel investors may have expertise and advice that can be as valuable as their money when it comes to growing your business.
The next step up from the angel investor is the venture capital (VC) firm. You might try a VC firm when you need a serious chunk of money (often in excess of £1 million) in exchange for a large percentage of your business. VC is the fundraising method of choice for high-growth start-ups, many of which go through several rounds of funding before becoming profitable. It’s a very competitive area, so you’ll need an outstanding strategy, a bulletproof business plan and a dynamite pitch – not to mention luck.
You can also raise funds online via crowdfunding. This works best with a consumer-facing business, with a product or vision that ordinary people can get behind. You put out the message that shows why your enterprise is a good investment, and a (hopefully large) number of investors each take small stake in the business. It’s essentially a digital-age version of selling shares, and has been seen to raise impressive sums – some companies have sourced over £4 million via thousands of micro-investors.
Which is right for me?
Cost and convenience aren’t the only factors when seeking funding for your business. Consider how each solution will fit into your long-term goals, and weigh up the risks of each one too.
Your main choice is whether to borrow or seek investment. Borrowing means you retain a full stake in the business, but repayments can be an ongoing burden that may slow your growth. Conversely, investment delivers a cash injection that you don’t have to repay, so growth may proceed more quickly – but you’ll have to share that growth with your shareholders. Talk your strategy over with your accountant to narrow down the best options in your circumstances.
Now explore the various paths to business growth.
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