Starting a business can be a costly exercise. Hard work, a sound business plan and a well-executed strategy can see your new start-up make great progress, but you might still benefit from business investment to help it reach the next stage.
Many new business owners assume that funding a business is limited to the early days of starting up. Whether it’s investing in equipment, such as the kit for a microbrewery or laptops for a creative agency to ensuring that you’ve enough cash in hand to cover off business expenses such as salaries, start-up funding is a vital lifeline for many new businesses.
Once your business is successfully trading and making a profit, it can become an attractive investment for further business funding, helping your business expand.
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Why seek business investment?
Growing a business can be tricky, especially if you’re only just making a small profit. You may be able to see the potential for your business idea, but investing in marketing, hiring additional staff and expanding premises can be out of reach for many small business owners.
As a newly launched going concern, there are plenty of reasons to seek additional funding:
- Marketing investment – with a proven business model, funding can be used to reach more customers and invest in different marketing channels such as social media or online advertising.
- Equipment and plant – expanding tooling, equipment and manufacturing capability can allow your business to produce more products to meet demand or develop a more effective manufacturing process.
- Staff and premises – offloading business administration or hiring a sales or marketing expertise can help your business grow.
- Inventory – if your business sees surging demand, it can take a while for sales to translate into ready cash that you can use for stock. Funding such as a loan, overdraft or credit line facility can boost inventory so you can capitalise on sales.
The good news is that most funding schemes and options aren’t restricted to freshly minted start-ups. Even if you’ve been operating for a few years, there are many ways to attract funding to grow your business. Businesses running for up to two years can apply for a Start Up Loan, for example, while options from angel investors to small business loans tend to be more applicable to businesses that have been running for a while.
Business investment options
There are several options for business funding. Which one you choose will be determined by the amount of money your start-up needs, why you need it, and how much of your business you’re willing to exchange for investment.
Types of funding include:
- Debt financing – Typically available in the form of a loan, such as an overdraft or bank loan, which can be secured against business assets or unsecured such as a Start Up Loan.
- Equity financing – Investment where funding is given to the business in exchange for a percentage of the business itself and is typical of angel investing or venture capital investment.
- Crowdfunding – Funds are raised by encouraging many people to each make a small investment in your business, usually in exchange for a reward such as early access to a new product or a small share of the company.
- Grants – Funds that don’t need to be repaid and are often given by organisations, local councils or as government-backed incentives.
It’s worth speaking to an independent business advisor and your accountant to determine the type of funding that best suits your requirements.
Debt financing is available in many forms – from high street bank loans to personal loans such as a Start Up Loan. Small businesses can expect to borrow a sum, such as £25,000, with the amount repayable in instalments over a set term, such as several years. Interest is usually charged on the loan, so you’ll end up paying more back in total than the amount you borrowed.
When applying for a loan, make sure you factor in the interest to understand how repayments can affect your cash flow and get an idea of the total amount repayable. Organisations that loan money, such as a bank, should tell you how much you’ll repay over the full term. Check to see if there are any early repayment penalties or features such as repayment holidays so you can pause repayments if cash flow is tight.
Other examples of debt financing include credit lines, where suppliers will allow you to pay for stock or suppliers later, often without interest, and factoring. This is where a business will buy your outstanding, unpaid invoices and pay you a smaller amount in advance, typically 90% of the invoice value. This can be helpful if you need a cash injection and cannot wait for customers to settle their bills.
Read our guide to debt financing for small businesses for further advice.
Some investors will be willing to fund your business in exchange for a share of your start-up. Smaller companies typically attract private investors, known as ‘angel investors’. Equity financing from an angel investor typically ranges from £25,000 to £100,000, making it suitable for larger amounts than debt funding. Expect to swap between 20% to 25% of your business in exchange for the investment.
Angel investors usually offer more than straightforward cash. Many are seasoned experts and offer advice, support and contacts that can help your business grow. It’s worth knowing that you’ll need a detailed business plan and pitch for your business, and raising angel investment can take time with no guarantee of success.
Read our guide to small business equity financing for further advice.
Crowdfunding has become a popular way for small businesses to raise additional funding, mainly using crowdfunding platforms. These provide a way to pitch your business to a large number of investors with small amounts to invest. By attracting a large number of small investors, you may be able to raise substantial amounts.
Crowdfunding is used for all manner of businesses. The Pebble Time smartwatch raised £14.3m on the crowdfunding platform Kickstarter, while start-up Flow Hive raised £9.3m for its range of home beehives aimed at domestic beekeepers.
You’ll need a good business idea that captures the imagination of lots of smaller investors. Many crowdfunding offerings include rewards for small investors, such as t-shirts, badges and products depending on the amount invested. Some will offer a small share in the business for investors.
Read our guide to crowdfunding for further advice.
Business grants are available from charities, local authorities, government schemes and organisations. Grants generally don’t have to be paid back but tend to be lower than the amount you can raise from debt or equity funding. Grants are typically associated with a scheme or initiative, such as funding businesses focusing on sustainability or employing people from the local community. Some grants are in the form of rebates, free services or discounts.
Read our guide on how to get a small business government grant.
Want to better understand business finance? Check out our free online courses in partnership with the Open University on finance and accounting.
Our free Learn with Start Up Loans courses include:
- Introduction to bookkeeping and accounting
- Money Saving Expert’s Academy of Money
- Financial accounting and reporting
Plus free courses on marketing, entrepreneurship, project management, management and leadership.
Disclaimer: While we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.