Business Funding Options for SMEs
Small and medium-sized businesses (SMEs) represent over 95% of businesses in the UK and can face many financial challenges including finding the right financing, paying for advertising, or raising sufficient working capital at the right time. In this article, we will take a look at some of the different funding options available to SMEs.
Crowdfunding is a way for entrepreneurs to raise small amounts of money from a large number of people through internet platforms such as Kickstarter. This can include individuals such as friends, family or the general public. If crowdfunding is on a donation basis then it does not have to be paid back, although many crowdfunding campaigns will offer incentives to early backers such as advanced copies of the product, or even potential equity stakes.
A successful crowdfunding campaign can also lead to investors becoming your business partners, allowing you to make use of their expertise which can help with your business growth as you have access to more specialist knowledge.
The downside to crowdfunding is that you’re not guaranteed any investment and the amount you receive is usually limited. This is because some crowdfunding sites cap the amount they will offer to investors, to reduce the risk of individuals spending a large amount of their savings on potential businesses that will fail.
SMEs are often eligible for government grants if they can meet certain criteria’s. This will generally include things such as business and financial information, project questions in relation to the funding you are applying for and specific project costing.
Grants will also usually come with a time limit, after which you may need to apply again, so you need to act quickly!
Venture capitalists are investors who generally support emerging and expanding businesses, this can be through key stages such as IPO’s or mergers. It is a form of private equity investment, where a business receives unsecured funding in exchange for a share of the equity.
Venture capitalists pool money from a number of investors allowing them to offer typically high funding, in excess of £1m. Due to the size of the investment Venture capitalists will have a high stake and therefore want involvement in running the business or even request to be on the board, which means using this method of investment the founders will lose more control.
Venture capitalists will generally keep the investment for 5-10 years
Like venture capitalists, angel investors are interested in high return investments but where venture capitalists are made up of companies and directors angel investors are high net worth individuals who are more likely to back a startup business.
Angel investors will typically invest less than a venture capitalist around £25k – £250k, although they may invest more if the deal is viable. Angel investors may or may not have industry experience but as high net worth individuals they are likely to be able to offer guidance and support for entrepreneurs if requested, although some may want to be a silent investor so understanding their goals from the outset will be useful to know how much involvement they want.
Angel investors will generally have less equity stake than a venture capitalist and therefore will not be able to outvote or force the founder out if the business does not perform well. Their investment period will be shorter than a venture capitalist, normally between 2-5 years.
Short term loans are another source of financing and can be obtained from a number of sources such as high street banks, independent lenders or challenger banks. High street banks are likely to have less interest but the criteria for obtaining will be stricter, so it will depend on your circumstances on which is the best way to obtain a loan.
Loans are favourable as they are a way to raise capital without releasing any equity, meaning the founder will retain full ownership of their business, however, most loans will be ‘secured’ meaning they will be borrowed against one or more business assets and some loans may want directors to secure their personal assets i.e. home.
Loans are typically anywhere between 2-5 years with interest payable almost immediately, so unlike angel investors (where capital is raised for a stake with no ongoing repayments) loans will require repayments, so consideration on cash flow is important when choosing a loan to ensure you do not default on repayments.
In House Funding
Many business owners rush to get funding before they know if they can actually fund via their internal day to day trading. Often with good management, forecasting and planning you can manage your working capital cycle accordingly to reduce the need for external funding. This will depend on ‘how’ much funding you need and when you need it but offering incentives for customers to pay early (i.e. full year payments upfront) can actually give enough cash to reduce the need for external funding.
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