Business financing

If you happen to find yourself in the fortunate position of planning to expand your business, you will need to consider your options for funding. There are several different approaches to guiding your business to the next level. You can invest accumulated profits back into the business, take out a business loan, sell off part of the business to investors, or look for other finance options, for example, crowdfunding.

Types of funding

There are many types of funding options available to UK businesses, and which one you choose will depend on the availability of cash, urgency, growth plans, and tolerance for risk. During early stages, most business owners will try to raise money from friends and family, although this can also be troublesome, especially if you don’t make it abundantly clear that there is no guarantee that the money will ever be returned.

1. Funding from personal savings

When first undergoing a growth phase, oftentimes the line between personal and private money gets blurred and business owners will tap into their personal savings accounts for business financing, often referred to as bootstrapping. There are many people who would never use their personal cash to fund business growth, and they would rather take capital from a lender, especially as a limited company, where if the business goes into receivership, no personal assets can be taken, and a strict distinction between business assets and personal assets is drawn. It’s probably more prudent to take out a business loan than to use personal savings.

2. Business loans

There are several types of business loans that you can avail of for the purpose of business growth. There is a choice between a secured business loan and an unsecured business loan, and knowing the difference between the two is important. The fundamental differences come down to the use of collateral, where with a secured loan, you will have to put forward valuable business assets along with a personal guarantee; in contrast with an unsecured business loan, you won’t need to put business assets on the line. The problem with an unsecured loan is that it poses a much higher level of risk to the lender, as such you end up paying higher interest rates and can assess less capital for shorter time frames.

There are different business loans available to an established business that include working capital loans, short-term loans, invoice finance, asset finance, and merchant cash advances. For a long-term loan, most lenders will expect to see a business plan and a road to profitability, this is to ensure that you will be in a position to make repayments for the duration of the loan term. 

3. Friends and family

There are probably very few successful entrepreneurs who didn’t start off with a loan from friends or family. While this might seem like a good idea, if the business goes bankrupt it can tear family and friends apart, and sometimes it's not worth it. The money that you receive from friends is usually interest-free with no strings attached but the risk that you will negatively impact your relationships is a risk that is usually not worth taking.

4. Venture capital

Venture capital is a type of financing where investors put money into small businesses that have long-term growth potential. The money comes from established entrepreneurs, investment banks and other financial institutions. For new companies or small businesses that have been trading for under two years, private equity is becoming more popular, especially since it is much harder to secure a term loan without a demonstrable trading history. Although with the evolution of the lending market, there are now many specialist lenders who take a holistic view of a business and its growth potential, even if a profit is yet established.

5. Crowdfunding

One type of financing that is growing in popularity is crowdfunding. This involved getting small amounts of investment from a crowd of individuals, usually via an online platform. A great example of a successful crowdfunding campaign is from the craft brewing company, BrewDog, which went from 67 employees and four bars in 2011 to 2,300 employees worldwide, at present. This was achieved, in 2009, by launching Equity for Punks, a crowdfunding model that raised up to £1m in 24 hours through thousands of minority shareholders. Crowdfunding might not be suitable for many businesses, but it's a great alternative finance option worth considering.