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How to raise finance for your small business

From loans to investors, remortgaging to grants, there are plenty of options available to you

Raising finance for your small business

Starting out with your own business - or growing an existing one - is almost always an expensive prospect, so it’s likely that you are going to need some sort of cash injection.

The most conventional ways of raising money for your business are loans through banks or other commercial lenders, or selling equity in your company to an outside investor. But there are many other ways to raise the necessary cash: you could use your own savings, take loans or investment from friends and relatives, remortgage your home, source government grants or subsidies, or get what you need by lease or hire-purchase agreements.

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Here are the pros and cons of the primary options that are likely to be available to you.

The commercial business loan

This is perhaps the most obvious way of getting hold of cash for your business, but it's far from the easiest way to do so. Loans for small businesses are much more rare than they once were, and you'll need a solid business plan, as well as a firm idea of when and how you're going to make your money, to persuade a bank to take you seriously.

You'll also need to find some means of securing your loan. If you don’t have sufficient assets to back you, ask about the Enterprise Finance Guarantee scheme, which the Government introduced to encourage lending to small businesses.

The outside investor

This is someone who will provide your business with cash in return for a stake in the ownership of it - and, of course, any profits. Often called ’angel investors’, these could be people you know - perhaps former colleagues - or professional investors. They could be keen to take an interest in the running of your business, or they could be a silent partner. A word of warning, though: professional investors can be very demanding business partners, so choose carefully.

Friends and family

As well as providing moral support, friends and relatives are often an excellent source of cash, and are likely to offer you a much cheaper rate of interest than a purely commercial investor. They might not even charge interest at all, or could simply be happy to take a small stake in your business. But make sure when you set out that everyone involved knows what they're getting into - it’s easy to spoil friendships or create family feuds if your venture turns sour. Take legal advice, and make sure that any agreement is drawn up as a formal contract.

Remortgaging

Securing a loan against your personal assets, most often through remortgaging your home, is a sure way to get a reasonable rate on finance. After all, a lender is risking a lot less if you fail to keep up repayments, because they're entitled to take back your house or car - but you have to be careful. Make sure that you're absolutely certain of your business case, because there's a lot to lose if things go wrong.

Factoring or invoice selling

Factoring is when you receive advance cash from a lender in return for ’selling’ them your unpaid invoices. It's possible to sell up to 80 per cent of your company’s invoices at any one time; this is a reasonably risk-free way to borrow in the short term, as long as you remember that the money you're advanced will be less than the sum of the invoices.

Grants and subsidies

There are all sorts Government grants, loans and subsidies available for businesses, be it from local councils, regional development funds or even the European Union. In fact, there are literally hundreds of finance opportunities available from the Department for Trade and Industry alone.

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These are often intended to help businesses buy equipment or train employees, and come in the form of straight grants, loans, or ’soft’ loans; the later are commercial loans subsidised by the Government, to make them available at a cheaper rate. The difficulty is in finding them, and going through an often long-winded and tricky application process.

You can find out more on how to get Government funding here.

Lease or hire-purchase agreements

If you are starting a small business, one of your biggest costs is likely to be equipment or machinery - and this might well include transport, such as a suitable van or car. In this case, the simplest way to access finance is via leasing or hire-purchase deals. These will normally involve you paying an initial deposit, followed by monthly repayments over a number of years.

Read more on lease and hire purchase deals for your van here.

Leftfield alternatives

If you'd rather not sit down in front of stuffy bank manager, or face a grilling from an angel investor, you might like to consider crowdfunding. This is where individuals provide small donations or investments that are pooled together. As well as being a less intimidating method of raising cash, this can also be a great way of spreading the word about your new venture, and allow you to gain an insight into how it might be received. If you fancy a go at this, try kickstarter or Crowdcube.

But... only raise cash if you really need it

Lastly, bear in mind all the inevitable risks of raising finance, and consider whether you're prepared to take them at this stage. Instead of trying to source a loan or other investment, you could start your business on a part-time basis, persuade customers to pay early, ask suppliers to hold off invoicing or simply get going using early cash revenues - your business might not grow as quickly as it would if you'd taken out that loan, but it will be more secure, and you won't have to pass your hard-earned profits back to another party. Other less-risky alternatives include unsecured overdraft facilities, credit cards or personal loans.

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