Whatever stage your business is at, whether a start-up or long-established, raising capital is often most welcome and can be a sound business decision to move your business forward. So what options are available when you decide to raise capital for small business?
Since the credit crunch, the options for raising capital have increased significantly with many new funders entering the business finance market. So what are the main sources available for raising capital for small business?
Most successful businesses have started by being financed initially by the proprietor themselves from their own resources. The amount required varies from business-to-business but, unfortunately, there’s often no way round it that you will be required personally to provide some capital to fund the early high risk stage.
It’s unlikely a lender or investor will want to take the risk of funding your business unless you are taking an element of risk yourself – this is sometimes known as ‘hurt capital’.
Family & friends
Raising capital through your family and friends can be a tricky and delicate subject, but is often one of the best and most cost-effective options. Approaching family and friends can feel like going to them with a ‘begging bowl’ but it shouldn’t; approach it in a professional and business-like manner as you would if you’re approaching any other potential funder.
You may be surprised who has surplus cash to invest and has confidence in you, and wishes to back your idea. If you obtain the funding, ensure everything is set up correctly and legally for the protection of all parties. If they decline your offer, accept their decision graciously and move on to another option.
Traditional sources of finance
Banks remain the most common way of raising capital for small businesses and, in particular, the main high street players. The good news is that they are keen to support SME’s and have sufficient capital available to lend at relatively low margins. The bad news is that banks tend to shy away from taking anything other than relatively low risks (hence their low margins) and this can be restrictive, particular in the higher risk early stages.
You need to have a sound business plan and a robust package of supporting information; professional assistance is often overlooked but, statistically, this can significantly improve your chances of success.
Alternative sources of finance
Compared to just 10 years ago there are many new and innovative ways of raising capital. Here is a selection of some old and new alternatives to consider:
This is a high profile and increasingly popular option for raising capital which involves businesses applying for debt (loan) or equity (share capital) funding via an online portal.
This involves funders providing finance with by taking collateral by way of your various business assets. This can involve utilising such assets as: Trade debtors/receivables (Invoice Discounting/Factoring) or Vehicles and Plant & Machinery (Higher Purchase/Leasing). Often an excellent option, especially for growing businesses with a low capital base.
Raising capital through specialist providers is becoming increasingly common. There is now a host of new entrants in the funding market, each specialising in a wide range of finance such as property investment & development and bridging finance. Typically, they are more expensive than high street banks but can provide an option which otherwise wouldn’t be available.
These are typically not-for-profit organisations funded by government or European money with the aim of assisting businesses where banks and other more traditional forms of funding may not be available to growing businesses for a wide variety of reasons. In view of the risk profile they support, their costs are normally a little higher than a high street bank.
Start-up Loan Scheme
Start-up loan schemes are a very popular way of raising capital. New businesses are often regarded as high risk by high street banks and, as such, are often not for them. This is an excellent government initiative aimed at provided loans of up to £25,000 per director/proprietor to businesses which are either start-up’s or less than 2 years old on discounted terms (typically interest rate of 6%).
It’s a common misconception that grants are no longer available to SMEs as a way of raising capital; this is not the case and can, in some circumstances, providing a useful source of finance for expanding businesses. Many business grants are regionalised and provided by Local Enterprise Partnerships (LEP’s).
If you’re looking for capital to fund high growth then this is cream of the crop and often the most difficult to secure. Typically regarded as relatively high risk, it is often out of bounds for banks and other debt funders. This is more the jurisdiction of equity investors such as Business Angels (private individuals) or Venture Capitalists (investment companies) which are prepared to take a higher degree of risk for a higher reward, usually in the form of significant capital growth.