I hear a lot from my clients that if only they had more money available to them they could take their business to the next level. So this month I thought I’d share some ideas on what types of funding are available to smaller growing businesses.
Why does the business need more money?
Before you start the process, it is worth assessing why you need more money. It may simply be that as a business owner you are taking too much out of the business yourself. By far the cheapest funding is the money that the business generates itself, so where possible try and consider taking less out.
Assuming additional funds are needed the next question is what is it for and how long will it be needed for? Once you know this you are good to go and make a decision on what type of finance will suit you best.
Can you afford it?
The first question any lender is going to ask is can you afford to repay the loan, so I’d strongly recommend before raising any funds that you prepare a business plan with financial projections, not only to show you can afford to borrow, but to give you a plan of action to help keep you on track for your planned growth. Hopefully if you are using Xero accounting software this can be a very quick exercise.
10 Alternatives to a bank loan
- Credit Cards – Only advisable for one-off short term requirements, if paid off straight away it is very cheap short term finance but can quickly become expensive if the balance is left running
- Bank overdraft – Possibly the most common way is to ask a bank for an overdraft facility; at lower levels security may not be required but any larger amounts will undoubtedly need security from the business owner. Overdrafts are for short term requirements and will have annual renewal fees on top of interest costs
- Start up loans – The “Start up Loan” is a government-backed personal loan available to individuals looking to start or grow a business in the UK. The amounts are available up to £25,000 for a period of up to five years at a fixed rate of interest
- Hire Purchase – Asset lenders will often lend against the security of the asset you are purchasing. This lending will generally be shorter term up to five years at a fixed rate of interest
- Asset lending – Similar to hire purchase above but some lenders will review assets you currently own and look to raise money against these over a period of up to five years at a fixed rate
- Sales finance – Often known as invoice finance or debt factoring. This is great for fast growing businesses that have good quality customers. The lender simply lends against the value of your invoice raised and pays you upfront. This is a more expensive option but allows fast growth
- Friends and family – Often a quick and easy place to start, but a word of warning make sure you treat it like a business loan to minimise any risk of falling out
- Peer to peer lending – There has been a boom in individuals getting together on a platform to invest little amounts in lots of different businesses; funders such as Funding Circle are out there to provide an alternative to mainstream lending to small businesses. Lending tends to be up to five years at a fixed rate of interest with less emphasis on security more on performance
- Crowdfunding – Effectively a charity sponsorship page for businesses, using sites such as Kickstarter or Crowdcube. You can pitch your investment idea to donors/investors, in return you can offer them differing levels of gifts as a thank you – this maybe in the form of products from your business
- Community Development Finance Association (CDFA) – Our local CDFA is Enterprise Answers and they aim to support to businesses that are unable to raise the finance they require from High Street banks. Whilst more expensive than banks they have helped many businesses achieve great things.
If you would like advice on raising finance please do get in touch.