Whether you’re a brand-new start-up looking for finance to help you launch, or an established business hoping to fund growth, you’re not alone in wondering what your options are.
Our guide goes through five of the most common financing options for businesses. We’ve also listed potential pros and cons of each, but these might vary from business to business.
Business bank loans
Around 30% of UK SMEs have a bank loan or overdraft, according to the British Business Bank.
The amount you can borrow, along with the terms and interest rates vary massively, so always do your homework. Like personal loans, business loans can be unsecured, or “secured” against an asset.
It’s important to remember that if you don’t keep up repayments on a secured loan, you could end up losing the asset it’s secured against.
Unsecured loans are less risky for you, but riskier for the lender, so you may need some form of payment guarantee. Interest rates on unsecured loans are also often higher.
- Usually fairly quick to set up
- You keep full control of your business
- Fixed repayment rates so you know exactly how much you’re paying back every month
- Late or missed payments will incur charges that increase your monthly repayment
- If you default on a secured loan, you risk losing your assets
- Banks will make checks that could affect your credit report. You could also really damage your credit report if you don’t keep up repayments.
Small business grants
There are lots of schemes run by both public and private agencies across the UK offering grants to businesses of all shapes and sizes.
The main draw of a business grant over a loan is that it doesn’t have to be paid back. But knowing exactly which grants are available, what the criteria are, and how to apply can be a bit of a challenge!
A good place to start is your local council or the Find Government Grants page of the Gov.uk website.
- Grants don’t have to be paid back, so no debt
- Many grants come with some form of free mentorship, giving advice and support about running and growing your business
- Your credibility could get a boost as it shows potential customers and investors you have a serious business that’s worth investing in.
- You’ll likely find there are some restrictions on what you can and can’t spend your grant on
- Many grant providers split their funding across several businesses, so you might not end up with the full amount you were hoping for. Competition for grants is always pretty stiff too.
- Some grant providers will only give you a grant if you can match it with your own money to invest.
Crowdfunding is where you pitch your business idea on a crowdfunding platform like Crowdfunder or social media and ask customers or investors to invest in you. Typically, rather than a few investors who contribute a large amount, you’ll end up with a large number of investors investing fairly small amounts each.
- It’s a great way to start building a loyal following, where investors can get involved right from the beginning
- It’s usually very easy (and cheap) to set up
- Crowdfunding can mean you raise the funds you need really quickly, particularly if your campaign goes viral
- You can set your own funding targets and change them as needed.
- Crowdfunding is all about effective marketing which can require a lot of time and effort to get right
- When it comes to crowdfunding there really are no guarantees. Even if you put together a super-duper campaign, it might not catch on. Plus, if you don’t hit the target, you may have to pay back any investors.
Think of the TV show Dragon’s Den here! Angel investors are usually successful, highly experienced investors at the top of their industry. Win them over and you could end up with a sizeable investment in your business (although yes, they tend to want to sizeable stake in it too).
Once you’ve pitched your idea to an angel investor, and the investor likes the look of what you’re offering, you can negotiate what they get in exchange. Which is where it can get a bit eyewatering.
- An investment doesn’t normally need to be repaid like a lone does (although some investors will offer a buy-back option, where you can buy the shares back in a few years).
- Securing an angel investment doesn’t require the payment of any charges or fees
- This is the chance for some serious kudos. Angel investors are usually well known in their field which can really boost your credibility (helping to attract more investors later)
- The knowledge and experience your angel investor brings can make a huge difference to your success, particularly when it comes to plans for growth.
- Angels expect to play an active role in your business, with a big say in how their investment will be spent
- Investment is usually made in exchange for a stake in the business, which means less for you.
Venture capital (VC) is similar to angel investment but instead of investing their own money into a business, venture capitalists will invest on behalf of venture capital firms. This means the money itself can come from a number of sources, including public and private pension funds, corporations, foundations, and wealthy individuals.
Venture capitalists are also looking to invest much larger amounts, often into the millions of pounds. This means they’re only really interested in businesses with extremely high growth potential in fast-paced areas.
- As with angel investors, VCs bring with them a huge amount of knowledge and expertise to delve in to
- No need to repay the investment
- Access to a substantial amount of funding
- Like other forms of investment, Venture Capital investment means you own less of your business
- Pitching is seriously hard work and competition is tough. Your pitch needs to be really polished with a solid business plan behind it
- Some companies can’t scale up as fast as a VC wants them to so it’s best to be market-ready with a highly tuned product or service.
Don’t forget, most funding options are a form of income, and any repayments are a liability – so you’ll need to show them in your bookkeeping! Find more tips and advice for your business on our website, or learn more about hiring an accountant.