If you are looking to grow your small business, getting a financial boost can be imperative. But finding the right funding is sometimes overwhelming.
From government grants to business loans, crowdfunding, and angel investors, there are a host of ways to secure money, each with their own benefits and challenges.
In this guide, we break down some of the more common funding options, and look at their pros and cons.
Just as with individual loans, business loans involve borrowing money from a bank and paying it back over a set period, complete with interest.
Not everyone will be eligible for such a loan, with banks likely to consider your length of time in business, annual revenue and credit score.
Prior to deciding if this is a good option for you, you should draw up a business plan to understand where the investment will go. It is likely that your bank will want to see this information before they proceed with any loan.
One advantage of a business loan is it’s usually the most effective way to secure a sizable injection of funds. Furthermore, unlike with other funding sources, a loan enables you to retain full control of what your money goes towards.
There are lots of government grants available for small businesses. These can cover a range of items and areas, from premises or new equipment to training. Grants will often favour small businesses that will have a positive impact on the economy or those which promote sustainability.
The downside of grants is that eligibility criteria can be quite strict, while the process of applying is all too often complicated and time-consuming. There can also be a lot of competition for each grant, meaning you could end up spending a long time applying but not being successful.
The best approach is to apply early, be sure to thoroughly read the application criteria beforehand, and be very specific in your application.
Crowdfunding involves collect small donations from a large group of people in order to fund a business idea. This normally takes place online via platforms like Kickstarter and Indiegogo.
Crowdfunding can consist of donation crowdfunding, when people donate without receiving anything in return, and reward crowdfunding, when people receive something for their investment. For example, maybe they’re able to access your product or service ahead of the general public.
Crowdfunding generally requires up-front marketing investment. For example, you’ll probably have to make a video explaining what your product or service is and why people should invest in it.
An angel investor is a wealthy individual - or group of individuals - who invest in early-stage startup businesses in exchange for a minority ownership stake.
These are generally people who have made money through their own business ventures. Think The Apprentice or Dragon’s Den. They’ll be able to share their business knowledge, skills and contacts to benefit your business.
This can be a good option for businesses with a great idea that requires up-front capital to get off the ground. Typically, angel investors can invest sums ranging from £5,000 to £500,000 in any one business.
The problem can be that angel investment comes with high expectations with investors looking for significant returns. This means they may push for rapid growth or strategic decisions that align with their financial goals rather than your long-term vision.
Peer-to-peer lending connects businesses seeking funds with individuals via online platforms, bypassing traditional banks. This funding comes from people who are looking for a higher return on their savings than they might otherwise get from traditional savings accounts.
To apply for such funding, you fill out a form explaining how much you want to borrow, how your business will use the money, and how long you need it for. The capital will need to be paid back, with interest, over the agreed loan duration.
Advantages of using peer-to-peer finance include quicker decision-making lower credit ratings not being a barrier. It can also be a less intimidating experience than traditional routes.
However, interest rates can be high, especially if your business is deemed to be a risk. Peer-to-peers loans must be repaid regardless of your business’s success, something that can put pressure on cash flow.
Most platforms also require personal guarantees, meaning you could be personally liable if your business struggles with repayments.
Disclaimer: The information in this guide is for general informational purposes only and does not constitute financial, legal, or investment advice. Funding options vary based on individual circumstances, eligibility criteria, and market conditions. Always conduct your own research and consult a financial professional before making any funding decisions.
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