The new money for businesses, announced by the Chancellor of the Exchequer in the budget, has been welcomed by SMEs. Money for start-up loans has been extended by £130 million and there is a further £200 million for the British Business Bank to invest in scale-ups.
In a country where 70 new businesses are created every hour, that has to be good news. A recent survey of decision makers at 250 start-ups across the UK revealed that securing a bank loan is still the most popular option, contributing around 44% of funding among those questioned.
Bootstrapping, using personal finances to get you project off the ground, is still a popular choice, 40%, despite the risks involved.
Putting your own money into a start-up is a good way to encourage investment from other sectors and some entrepreneurs choose to go it alone until their business goes into profit. The attraction of self-funding is that you don’t have to deal with loan repayments, and you don’t have to sign away control of your company.
Alternative loan providers account for a further 25% of the money raised, in addition to providing loans in the way that a bank does, these providers also offer a range of other ways of bringing money into your business, such as invoice finance, asset backed loans, hire purchase and leasing. Invoice finance is a particularly interesting strategy. Late payments to SMEs currently average around £80,000 and in London, that figure rises to £107,000. Invoice finance covers the cost of these late invoice payments until the invoice is paid, at which time a percentage fee is charged.
Venture capital, which accounted for 24% of the investment, provides high levels of funding to start-ups and small businesses which are perceived as having the potential for dramatic growth. The effects of such big cash injections can be dramatic, but the well-known downside is that investors get equity in the company and a say in the decision making.
Another form of venture capital, which accounts for 21% of the investment, comes from what is known as Angel Investors, a deceptively benign name for a set of particularly hard-nosed individuals. These wealthy investors, typically successful entrepreneurs or retired executives tend to invest in areas in which they have acquired expertise. In addition to finance they can also provide mentoring and networking opportunities, but their assistance will again require you to relinquish part of your control of the company. An alternative to seeking investment from venture capital, is crowdfunding, which was accessed by 20% of the survey respondents. Crowdfunding platforms, such as Seedrs are an increasingly popular choice because they provide access to funding without the need to relinquish any control.
If you are looking to secure finance for your company it’s well worth learning from the experiences of entrepreneurs who’ve been through the process themselves. It’s also worth doing some serious thinking about how, once secured, the money is best spent. 95% of the start-ups surveyed said they experienced real difficulty in deciding how best to spend the money and 18% said that their teams don’t have the necessary freedom to spend for company growth. Many companies are now looking into systems like prepaid cards which give employees freedom to make purchases using cards prepaid by management.