Happy New Year. For most of us, January is a prime time for taking stock and making plans. These plans often involve needing hard cash to finance either a start up, or expansion of your current business.
But what type of finance you need depends on how much you require and what you want it for, so I thought it would be useful to provide a run-down of the different types of funding available and where to find it – after all, it’s getting harder and harder for small businesses to get financing from banks.
A loan – but instead of being from a bank try a community finance source. Responsible alternative lenders which can be found at http://www.findingfinance.org.uk/ or community development finance initiatives http://responsiblefinance.org.uk/. These are usually best for start-ups or if you need a fixed amount to invest in something specific rather than day to day outgoings. For variable cash flow and to cover peaks & troughs, an overdraft might be more appropriate. Beware that loans which come with interest repayments, may need to be secured against your property and can be inflexible.
Invoice Financing – is where a bank or financial institution buys your business’ unpaid invoices for a fee – the amount depends on the finance company used. If your business has to pay for goods up front this can really help with your cash flow. Companies can receive up to 85% of the value, freeing up cash for you to invest back into the business.
Invoice Discounting and Debt Factoring – are the two types of Invoice Financing used in the UK. The former allows you to manage your own ledger and collect your own debts, while factoring means the finance company liaises directly with your debtors – both systems involve a fee for the service. Lenders can be found through the Asset Based Finance Association.
Equity Financing- is where an investor – often a venture capitalist – acquires part of the business and then shares in the business’ profits and losses. This shares the financial risks and profits but also gives away part of your business. For venture capital companies click here. (Only applicable to limited companies, not sole traders or partnerships.)
Grants – These are given for specific projects from the government, the European Union, local councils and charities. Although the process may be competitive, the grant often may not need to be paid back in full or have interest repayments attached. However the money will have to be used for the purposes that they were allocated. See what you might be eligible for here.
Crowd Funding – Involves lots of people lending smaller amounts of money that’s pooled to raise the investment through companies such as Crowdcube and Seedrs and is currently a really popular way to try and get funding. But beware! Its new found popularity is quickly making it a very competitive market, so although it can be cheap and relatively quick to launch, if the funding target isn’t reached the pledges are returned to investors. A list of crowdfunding platforms and what markets they cover is at www.ukcfa.org.uk.
Angel Investors & Peer to Peer Loans– Generally successful entrepreneurs who want to invest in start ups. There are now companies that can put businesses needing funding in touch with potential angels such as The UK Business Angels Association. Similarly Peer to Peer loans are private investors who wish to make a personal investment in a business for a fee – Zopa.com is currently the UK’s largest platform for this.
These links are useful if you’re thinking of launching a start up this year…
• Find out more about the government’s start up loans here https://www.gov.uk/start-up-loans and how to get funding for them here https://www.gov.uk/starting-up-a-business/get-funding
• The government’s Seed Enterprise Investment Scheme provides investors with tax relief, making your company more appealing for investors.
I’ll be speaking about raising finance at the Richmond Entrepreneurs Conference on 25th February 2016.