New Business Series: Explore the different ways you can fund your small business
This next article in the New Business series explores the main ways in which you can fund your business.
Crowdfunding raises money for your business by asking a large amount of people to invest small amounts of money to raise a target amount. This money can be used to get your start-up idea off the ground, or to invest in a new idea to help your current business grow. All you have to do is inspire people to believe in you and your business and give them an incentive to give their cash to your cause.
The main type of crowdfunding is reward crowdfunding – which involves offering investors rewards for their money such as product samples or experiences. For example, a craft beer company might offer investors of £50 a gift set of some of their best-selling products, and investors of £100 or more a tour of their brewery. Another common type of investment is Equity crowdfunding, which offers investors a stake in your business, promising real financial rewards in return for believing in your company.
There are a huge number of crowdsourcing websites available, such as Indiegogo.com, Kickstarter.com, Fundedbyme.com and Crowdfunder.co.uk.
Apply for a business loan
Another option is to apply for a loan with a bank or a business lender. This is an option typically for businesses that are more than a year old, but this varies according to the lender. Many banks will only look at businesses that are more than two years old, but some start-up loan companies will look at completely new businesses if they believe in the idea and business plan.
A business loan works like any other loan – if approved, you will be given a specified amount of money, which you will then have to pay back over a set period of time, with interest.
Many factors will determine the amount of money you can borrow, the amount of interest you will have to pay, and how long you will have to pay the money back. Again, these vary from lender to lender, but the main factors are:
Your business plan (we’ll guide you through creating one of these in our next article)
Your own financial health – do you have a good credit score?
How long you have been in business
Your available collateral – this is the assets you own, such as property, that in the event that you can’t pay back the money, you will have to forfeit to the lender. An unsecured loan allows you to borrow money without using collateral, but these will be for smaller amounts.
Making a business loan application can be a long and drawn-out process with lots of paperwork required. Lenders will have varying lending criteria that you need to meet and will ask to see lots of documentation and evidence. There are a few business lending websites that try and make the process easier, such as Funbox.com. Kabbage, or Balboa Capital.
Seek investment from an Angel Investor
This is an individual with a high net worth, who uses their own money to invest in young businesses in return for a share if that business makes a profit. Sometimes an Angel Investor will invest right at the start of a business, based on how much they believe in the founder and their idea, and try to help them succeed. Angel Investors know they are taking a risk, but they often invest a small amount in lots of startups, playing the numbers game in case one of them makes a lot of money back. Angel Investors are common in the tech start-up community and are a popular way to get a cash injection in the early days of a business. However, Angel Investors often like to be closely involved in business decisions, which can be a challenge for some business founders who prefer to run things without having too many people making the decisions.
Some Angel Investors use crowdfunding websites to find young start-ups. You can also find Angel Investors to pitch to on sites like Angel List.
Seek investment from a Venture Capitalist
Unlike Angel Investors, Venture Capitalists do not invest their own money in new businesses, instead they work on behalf of a public or private firm that invest other people’s money for them in the hope of turning a profit. This means Venture Capitalists have the ability to invest much larger sums of money, as they are pooling resources from many wealthy individuals, pension funds or large corporations. They typically invest in companies likely to make bigger profits, such as those in the tech or pharmaceutical business. Often a committee of people from the Venture Capitalist firm make decisions on whether to invest in a business, in return for a large share of the business.
Ask family and friends to invest or lend you money
This could be a great investment opportunity for your family and friends if they really believe in your idea. However, if things go wrong and they end up losing money, there is the risk that you could damage those relationships.
Ultimately, you need to research your best funding option based on the type of business you are starting, how long you have been in business, how much you need to borrow, and any number of the other factors mentioned above. However, the first thing you need to do before beginning your fundraising journey is to create your business plan so you can prove to investors or lenders what you will be doing with their money.
Look out for our next article on creating a business plan.