7 ways to obtain business finance
Obtaining funding is undoubtedly one of the biggest challenges that many businesses face. The days where you could just pop into your local bank, have a word with the manager and obtain a business loan are all but disappearing.
Nowadays, it is incredibly difficult for most companies to get the funding that they need.
In this blog, I list some of the main sources of funding that are available to startups and small businesses.
While there are many to choose from, my focus is on the loans that are most accessible to small and medium-sized enterprises (SMEs).
Government Startup loans
The startup loan is a government-backed credit scheme that is available to entrepreneurs wishing to set up their own business.
Successful applicants will get access to finance and 12 months of free mentoring, as well as business offers.
The loan has a repayment plan of between 1-2 years and is unsecured, meaning that business owners do not need to put forward any assets or guarantors in exchange for their loan.
Every owner or partner within the business will be able to apply for £25,000 each with a maximum of £100,000 that will be made available to use within the business.
Another way for businesses to generate more revenue is crowdfunding. Crowdfunding is when a number of different people contribute a relatively small amount each to fund a project or venture.
With crowdfunding, entrepreneurs can get funding for a particular project and will often offer something in exchange for a donation, such as shares in the business, royalties, a discount on an art piece, or a free online coaching session, etc.
Over the years, crowdfunding sites such as Kickstarter, Crowdcube, Seedrs, Indiegogo and Crowdfunder have seen an explosion in popularity and they have helped many business owners to get their companies off the ground.
Many of these types of sites can put companies in touch with equity investors who will give money to a company in exchange for a share in that business.
Peer-to-peer lending is the close cousin of crowdfunding. It is based on the same concept of having many different individuals funding a particular project, with the idea that individuals or “peers” will lend money to other businesses, without the intervention of a bank.
Unlike some of the crowdfunding sites, this money has to be repaid. Some of the most popular peer-to-peer lending websites are the UK based P2P website Zopa, which made its first appearance on the internet in 2005 and Lending Club, which is the US equivalent.
A credit union is a non-profit-making money cooperative whose members are able to obtain loans from pooled deposits at low interest rates.
They are a fast growing alternative to banks and building societies and they usually offer a range of savings accounts, current accounts and loans to their members.
Most credit unions have an eligibility criteria, which sometimes include a common bond, such as living in the same area, being in the same industry (such as the police credit union), or being part of a trade union, church or club.
They will often provide similar facilities to bank such as an ATM card, direct debits, standing orders, loans and savings accounts.
Bridging loans are funding options designed to provide short-term solutions for businesses before they receive their main loan or credit.
It may take weeks for a business to get approved for a loan but a bridging loan can be obtained in as little as 24-48 hours.
Quite often businesses use bridging loans to purchase or renovate a property, pay off an urgent debt, or any other solution where the money is needed immediately.
Applying for grants is usually a competitive process and there is often a strict eligibility criteria.
Some examples include capital expenditure grants that will provide the finances for buying large companies, assets or properties. There are also other grants such as University Knowledge Transfer Projects that are given to innovative companies or projects that are at the cutting edge of their field.
If you are a social enterprise or charitable venture, then there are more grants available to you. Some of these include the Big Lottery Fund, Arts Council, CAN Invest Community Foundation and European funding (European Social Fund), for example.
Asset financing is a class of loans given to businesses to obtain the equipment they need to grow.
This could be for things such as vehicles, machinery, furniture, electrical equipment, etc.
One form of asset finance is Invoice Financing. These are asset-based lending products that allow companies to access loans while they are waiting for customers to pay their invoices.
So if you are in an industry where you invoice your customers and they take a while to pay you back, then an Invoice Finance solution will allow you to receive an asset-based loan that covers your costs while you are waiting to be paid by your clients. This is known as Factoring. Unlike traditional asset-backed finance, the loan is secured against existing assets such as invoices, stocks or property.
Once your customers pay, you will then be able to repay the loan. Some invoice financing firms will credit check a customer for you, before they lend you any money.
The examples provided above give just a small snapshot of the kind of financial help and solutions that are available to businesses.
One of the most glaring omissions is banking finance. While it is still possible to receive loans from banks and building societies, I have tried to concentrate on the type of solutions that are more readily accessible to most businesses.
Ultimately, loans and grants are just a small part of the journey for enterprises. The ultimate aim for most companies is to be self-sufficient and financed by clients if you are a private organisation or donations if you are a charitable one.
Therefore, the main focus should be on how to generate leads and sales to reduce the necessity of relying upon competitive grants or loans that have to be repaid.
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By Janine Griffiths