Funding for your Small Business or Start up
What is Small Business Funding?
New companies at their start need strong capital backing to establish their businesses. Since most business owners do not possess sufficient personal funds to sponsor projects, they seek finance from outside investors until they can make profits and fund business expansion. Investment companies cover a wide range of industrial sectors and provide monetary assistance to start-up and expanding companies through small business funding schemes.
Small business funding can be defined as finance provided to young, early-stage companies by large investment bodies in possession of great quantities of wealth to further their business projects, cover costs and fund new ventures.
Types of Small Business Funding
Small business funding can be obtained from various sources:
Self Funding: If possible, self financing is the best form of funding for a business. Personal finance, either acquired from personal savings, family, friends, or from business profits, involves minimum risk. In comparison to venture funds and bank loan liabilities, personal funding is safe and less obligatory. Without the impending pressure of making profits and returns on investment to third party investors, companies can exercise flexibility in business processes and execution, with modifications where required. The greatest advantage of self funding is that entrepreneurs can exercise full control of management of his/her business, without interference from outside investors.
When self funding a small business, remember to:
- Make informed decisions based on thorough market research.
- Consider the type of business and amount of small business funding required.
- Evaluate employee skills required for business.
- Determine the amount of entrepreneurial control and involvement you are willing to exercise.
- Appraise your business model and strategy.
- Decide the number of months/years your business will require small business funding, and make business plans accordingly.
Bank Financing: This is the most sought after option for small business funding. Most new business owners will seek out banks for loans to start or expand their businesses. Banks provide small business funding in exchange for personal guarantee or security in the form of assets owned by an individual or the company.
Why banks may decline loan applications?
- Startups are considered high-risk ventures. Many banks decline loan applications by early-stage businesses lacking sufficient security or business experience to support them.
- Due to the rise in number of small ventures in the past couple of years, banks have witnessed an overcrowding of loan applications. This has lead banks to revise their loan provisions and terms and make business loan acquisition available to only those companies that fulfill their strict loan criteria. Since most nascent businesses and their applications lack finesse, banks may refuse lending finance.
- With numerous businesses cropping up every day, banks feel the need to exercise caution. As a result, loan eligibility has become extremely stringent, which most startups or expanding companies find difficult to fulfill. Consequently, they are rejected bank loans.
Building a good personal and business credit history, assembling securities and producing the right documents at the time of application, will enable acquiring a loan. Banks differ in their loan schemes; a thorough research before applying is important.
Private Equity Small Business Funding: Private equity, or venture capital, supports business growth through high-risk, high-return investments for approximately 3 to 7 years before capital funding is withdrawn. Venture capital investing firms provide small business funding to high-potential growth businesses in exchange for company shares.
Venture capital small business funding comes as a six-stage financing that corresponds with the developmental stages of a company:
- Seed Money financing or low-level funding helps prove a business idea and is provided by an affluent individual or angel investor.
- Startup financing is provided to companies to cover business marketing and development costs.
- Following product development, first-round capital funds take care of a company’s early sales and manufacturing costs.
- Since most businesses are yet to make profits from sales, second-round financing allows companies to continue their product marketing processes.
- Once a company starts profiting from sales, third-round or ‘mezzanine’ financing allows business expansion.
- Continued funding encourages companies to ‘go public’. This is also called ‘bridge’ financing.
Targeting dedicated venture capital companies with proven track records of investment successes ensures the best results for your business.
Angel Investments: An angel investor is a high-net worth individual who invests capital in new, start-up businesses to help companies successfully launch themselves in the market and grow steadily there from. Angel investments are typically made towards fresh companies in their early stages of development. Small business funding provided by angles constitutes the bridge between personal financing and acquiring large quantities of venture capital funds. Acquiring small business funding from a business angel is like obtaining venture capital from an individual.
Angels provide small business funding with focus on earning high returns on initial investments, often surpassing profits earned from other, more traditional investments. Finance provided to unquoted companies is often made in exchange for part ownership or convertible debt of a business.
Angel small business funding should be sought by a company when:
- It has a product that is fully developed and ready for the market.
- It has already invested a substantial amount towards business and exhausted financial alternatives.
- It has some existing and confirmed customers and prospects.
- It has a business plan capable of fast growth and generating over £10 million revenue in 3 to 5 years.
Government Grants: UK Government grants play a pivotal role in providing small business funding for startup businesses. Small business grants are awarded to proposed projects with a specific purpose. Grants cover a percentage of finance needed. The remaining capital for business is to be borne by the business owner. Companies are required to adhere to the strict rules specified by a grant to avoid repayment of funds. Businesses need prove their capability to provide their share of total capital. Most Government small business funding requires matching of funds.
Types of small business funding provided by the UK Government:
- Grant for Business Investment (GBI) for purchasing key business assets.
- R&D grants for research and development of new business ideas and existing business processes.
- Employment and Training grants for employee skill identification and enhancement.
- Real Estate grants for real estate development.
- Selective Finance for Investment (SFI) for creation and safeguarding of jobs.
Grant applications must include details on business projects, their benefits, execution plans and costs involved. Significant ideas, innovative approaches and expertise are essential constituents that will help secure small business funding. Relevant experience in the chosen industrial sector is an additional advantage.