So you are hoping to start your own business – but how do you go about getting small business funding?
The good news is, today’s entrepreneurs often don’t need huge amounts of cash to get their company up and running. It’s never been easier to set up an online business, for example. In fact, many businesses start as just one person, a computer and a phone.
But even if you don’t require pots of money, you’re going to need some cash to get started.
You can, of course, try the banks, but they are being notoriously tight-fisted when it comes to lending money in the current economic climate.
So if the banks knock you back, where else can you turn to get backing for your business? Check out our 10 alternative sources of funding below.
1. Credit Union loans
Banks aren’t the only institutions that provide loans. One alternative is Credit Unions – non-profit co-operatives that offer very competitive savings and loan rates to their members. Not all Credit Unions lend to businesses, but even those that don’t may lend to you as an individual. Find out if there’s a Credit Union near you by visiting The Association of British Credit Unions website.
Banks aren’t the only institutions that provide business loans
There are also many ‘Community Development Finance Institutions’ (CDFIs) that lend money to businesses. You can search for CDFI loans here.
2. Credit cards
Plenty of businesses have been funded on nothing more than credit cards. While they can be a convenient source of cash, they are also potentially very costly with the interest charges and penalties they carry.
If you do use them, be aware of the fees of the card you are using. (See these top five credit card pitfalls to avoid.) Credit cards are perhaps best suited to funding the early stages and basic expenses of a business if you use them at all.
3. Angel investors
Angel investors are usually rich individuals who invest in your business in return for an equity stake (normally between 10%-30%).
They are often entrepreneurs themselves, so they know what it’s like to start a business – and are therefore often more patient than other lenders in waiting for a return on their money.
If you can put a decent pitch and business plan together for your business, Dragon’s Den style, there’s no reason you can’t attract funding. The process of meeting Angels isn’t as daunting or complicated as you might expect either – see the UK Business Angels Association for more details on how to get started.
The idea behind crowdfunding is simple: you present your business idea online (along with the amount of money you need to raise) and if people think your idea is a good one, they’ll invest.
Crowdfunding has huge potential for start-up businesses
Your business pitch is normally written down, but many sites allow you to record a video presentation as well if you want. Go to Banktothefuture.com, Seedrs.com, and Crowdcube.com to see crowdfunding in action.
Put a good business case together and it’s perfectly possible to attract hundreds of willing investors, all chipping in towards your fundraising target. People can invest anything from a few quid to thousands of pounds. In return, investors get a small stake in your business (depending on how much they invest).
See our full guide to crowdfunding.
5. Peer-to-peer loans
‘Peer-to-peer’ lending has exploded in popularity over the last few years. It grew out of a simple idea: businesses need loans, but the banks aren’t lending. Savers want decent returns on their money, but the banks aren’t paying. So why not ignore the banks and bring businesses and savers together through the internet?
Everyone wins: businesses get the money they need at a reasonable rate while savers get a decent return on their investment.
There are quite a few charities that offer loans to small businesses. Some restrict their loans to certain geographic regions or segments of the population, but it’s still worth looking into. For example, the Prince’s Trust offers grants of up to £4,000 for young people aged 18-30 to set up a business, while the charity Prime offers a similar service for people over 50.
7. Asset-based lending
An asset-based loan is a bit like a mortgage – you borrow money against an existing asset or possession. This could things like property or equipment (‘tangible’ assets) or even patents and intellectual property (‘intangible’ assets). If you can’t meet your financial obligations, the asset is repossessed.
Asset-based loans are increasingly popular – but always check the small print carefully
Asset-based loans are becoming increasingly popular – they currently provide over £16 billion a year to small and medium sized UK businesses – but as with any loan, take special care in reading the small print and watch out for any hidden fees.
Factoring gives your business money by freeing up cash from unpaid invoices (so is only suitable for businesses that are already up and running.)
If you team up with a factoring company, they will advance you a percentage of the value of each unpaid invoice they take on (usually between 70%-90%). They then take responsibility for chasing that invoice. Once the invoice has been paid, they will pay you the remaining balance due – minus their fee.
Factoring can speed up your company’s cash flow (you can draw on funds as soon as the invoice has been approved) and it frees up the time you’d normally spend chasing payments.
The downside is that some of your profit will go to the factoring company. You also need to choose your factoring company with care, as they will be dealing directly with your clients.
9. Government grants
Government grants for small businesses are thinner on the ground these days, but there is still money out there to be claimed. What’s available will depend on what sector your business is in and where it is based. Find out what financial support your business may be eligible for at the business finance section of the Gov.uk website.
10. Friends and family
If you have supportive friends or family with some cash to spare, they can be a great source of funding. They’re likely to be more flexible as to when you pay them back, and they won’t rip you off with high-interest rates (hopefully!).
Always draw up a written agreement with any loan
But – no matter how close your relationship with them may be – it’s always a good idea to draw up a written agreement stating when the loan will be repaid and any interest that is payable, so you both know exactly where you stand.
Disclaimer: Where we compare financial products or solutions offered by different financial services providers (or make a recommendation in relation to a particular product or provider) we do so as the providers of an information service. This is not intended to constitute a recommendation, invitation or inducement to any particular individual to make any specific investment. Any financial decision should be researched thoroughly to ensure it is suitable for your business.