There are various ways a business can get funding, each with their own advantages and disadvantages. The type of funding will also depend on your specific circumstances and so not every business will be suitable for every type of funding. In this blog, we take a closer look at how to get funding for a business.
Owner Introduced Funds
This is the simplest, cheapest and most common source of funding for the majority of small businesses, particularly in the very early days. Owners will typically inject funds into the business to get things started and give the company enough cash to get going. This is most commonly done as a loan to the company but it is sometimes appropriate for the owner to buy a significant value of shares instead of a loan.
The drawback of this method is that the owner’s funds are likely to be limited; once they have been used up, the business will need to consider other funding options. The owner will probably want his money back at some point as well.
Business loans from banks are a great way to allow a business to have the funding they need to expand. They can also be quite flexible, for instance getting a business overdraft.
For a more detailed breakdown of exactly what you need for a business loan check out our blog on how to apply for a business loan.
Loans are obviously more costly than introducing your own money and you will often be asked for security on the loans (either against business assets, director guarantee or both). They also require some admin (i.e. cash flow forecasts etc) as part of the application process.
However, if a loan will enable you to meet a business opportunity, they are an excellent method of funding.
If you are specifically looking to finance the acquisition of a business asset, whether that is a new vehicle or a piece of machinery, hire purchase (HP) can often be a very simple way of getting finance.
If you buy the asset through a dealer they will normally do a lot of the leg work for you on the HP setup so it can be very light on admin. The interest rates aren’t normally as favourable as bank loans and sometimes there are hidden costs (like final balloon payments etc) so keep your eyes out for those.
Other slight variations on HP are leases (which normally cover maintenance costs as well as use of an asset but you do not own the asset) and PCP (which normally has lower monthly payments than HP with a higher balloon payment) – both of these can be attractive options when acquiring a business asset.
This is where you fund a project or venture by sourcing small amounts of money from a large number of people and, in some instances, the cost to the business can be very small. An F1 team did it and gave each participant a small amount of advertising space on the car. I have also seen a running event raise funds and offer free future events for those that take part in the crowdfunding.
In these instances, no equity has been given away and very little cost has been incurred so this can be very powerful funding. It also doesn’t need to be repaid.
You do have to have the correct marketing approach and budget though to ensure you reach your target audience and that enough of them invest. Otherwise, you may struggle to fund your additional marketing costs let alone the project you were planning.
External Equity Investment
This can take various forms, from friends or family buying shares in the company to Angel Investors or Venture Capitalists (VC) investing in the business’ shares.
Unless the owner buys more shares themselves, and regardless of who is investing, this method will almost always result in the owner/s diluting their shareholding. In other words, they will own a smaller percentage of the company after the funding is taken on.
Equity Investment, especially via VC money, is typically used for raising substantial funds, normally to enable rapid growth, and is very common for tech start-ups.
As a result of a dilution in shareholding you may start to receive pressure from your investors to increase growth, so this is another consideration to be aware of.
Thank you for reading our outline of the different methods of getting funding for a business. If you would like to chat about any form of funding that you might think is appropriate to your business please do get in touch.