The Why and How: Business Financing for Startups
The benefits of business financing
If you’re planning to grow your business, you may need additional funding — and a whole lot of it. Scaling a business can be a costly process, but get it done right and you’ll be paid back tenfold in the future. Whether your plan is to simply improve cash flow or to prepare for a business acquisition, there is a range of ways you can source the necessary funds.
Raising business finance and building capital is essential for a business’s stability and growth. By seeking funds, it enables you to grow your business at a much faster pace and on a larger scale than what would be possible if you waited for the income to come organically. In any market, timing is critical and you don’t want to miss any opportunities. For example, if you see a gap in the market that is not yet being catered for, then it’s crucial that money is not an obstacle for this moment.
Raising capital for your business
Running a business requires a high level of capital, especially financial capital. It’s important to prioritise raising the capital of your company in order to equip it for success. Good financial capital represents a good deal of power — regardless of your market or industry, it can be the difference between a business rising or collapsing.
Fortunately, you have many options to choose from when it comes to raising capital via business financing. To decide which route suits you more depends on the type of business you have — factors to consider include the size of your company, how much money you need, the nature of your growth plans, and how much control over your business you’d like to keep. Whether you’re a start-up or a large enterprise, these factors impact what kind of financing is more suitable for you and is dependent on what stage your business is presently at. For example, seeking an angel investor may be more feasible for a start-up in its early stages.
However, it’s important to note that certain forms of financing, such as seeking investors, often involve having to give up some control of your company. You should bare this in mind when planning for future growth, and how you can ensure investors’ needs are met regardless of the scale of your business.
Types of business financing
Broadly speaking, your options are separated into two categories — to borrow money which is then repaid later, or to sell equity shares in your company through investment.
One method of raising finances is seeking an angel investor. These are high-net-worth individuals who are interested specifically in investing in start-ups. This is a great way for small businesses to get their foot in the door, especially during the early stages of development. Through angel investment, a start-up could raise anything up to £1 million. Often, angel investors have the professional insight to accurately decide which businesses are good value for their money.
This is often the finance of choice for start-ups planning for high growth. You would seek out a venture capital (VC) firm if you are looking for funds that are an excess of £1 million. However, these firms ask for a large percentage of your business in return. Seeking venture capital is incredibly competitive so you will need a killer business plan and pitch.
Also known as crowdfunding, peer-to-peer funding is when small amounts of money are borrowed or lent directly between a large number of individuals. Individuals are happy to lend their money at an agreed interest rate and you can negotiate the timeframe of repayment. Peer-to-peer (P2P) funding is great for borrowers who may not be eligible for traditional methods of finance, investors assess businesses on an individual basis and offer lower interest rates than conventional lenders. This exchange is usually done on a trusted peer-to-peer online platform such as Prosper.
Seller financing is a type of funding that is found via business acquisition. In order to facilitate the sales process, the seller starts with a down payment, and then the balance (known as deferral) is paid through regular instalments negotiated in the shareholder’s agreement.
Buyers can also ask sellers to loan money on top of the deal agreement. This can be beneficial as the seller will have opportunities to invest their money and it can quicken up the process (as there is no third-party lender involved). Additional finance would have an interest rate and payback agreed upon based on your own terms and conditions.
Invest in investment planning
While business financing will reward you in the long run, it’s important to establish a sturdy financial strategy to reduce any risks. If any potential threats are overlooked, this could be fatal to your business’s growth. Investment planning is essential to not only prepare for risk and development in the future but to also clearly highlight if business goals are being met in the present. With the threat of recession and inflation, more than ever is it important to ensure financial security for you and your business.
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