A very common reoccurring issue I hear is how to get funding and investment for a small business. I was recently asked to talk about this for Small Business Britain and Lloyds Bank Academy so I wanted to share here too. And of course, please do get in touch if you would like to chat further.
There is a lot of noise, jargon and uncertainty around how to get funding and investment for small businesses, so I want to start by demystifying some of the jargon. I’ll also explain what some of the common sayings, phrases and abbreviations actually mean.
This means when you have had no outside funding and have used personal savings or have been reliant on sales to build the business from the ground up. Great for growing a business from scratch and you really value the money and work put in. It can be tiring though and limit rapid growth as it’s often organic.
Angel & Seed Investment:
This refers to investment from wealthy ‘angel’ individuals in high-growth businesses and ‘seed’ may be pre-revenue lower investment amounts. It can be hard to raise funds pre-revenue so typically seed amounts are smaller in order to reduce risk exposure.
One which a lot of us are familiar with, this is where small amounts are raised from a large number of donors via online platforms. This format really only works for business-to-consumers and for businesses that have already have a good following. You need to understand how to convert your followers, have built a good pipeline and have initial funds before crowdfunding.
This is where ‘venture capital’ has been invested in high-growth businesses in the early stage which represents a smaller portion and higher risk. ‘Private equity’ is where you may give up a large proportion of control at a later stage in return for a higher investment.
Now we understand some of the terminology, we can talk about funding ideas for your small business and look at the pros and cons of each:
- You retain control of your business
- Variety of loan types: start-up funding, asset financing for new equipment or stock and working capital loans.
- You may decide on making a personal ‘loan’ from your savings. i.e, redundancy or longer-term savings rather than a bank.
- Can be difficult for start-ups without trading history – might be better for more established businesses
- How you spend the loan may carry restrictions – ie, for growth, assets, generate a return, not ongoing overhead costs
- Risk against your assets if you secure the loan
- Access to a variety of investment options depending on the stage of business. Ie, pre-revenue or business plan stage to established long-trading business
- May have less restrictions on how you spend, ie, capital or revenue
- Growth focused so payment is based on returns, not monthly loan payment
- You may lose partial or full control of your business as you give up a stake commensurate to the level of investment
- Preparation is key – be prepared to tell your story, have your stats, ROI and be ready to pitch to many investors
- Family and friends may invest but mixing business and personal relationships may be uncomfortable
- Partial to full funding for specific projects which you may not afford otherwise
- Full grant costs for equipment etc are great as you may diversify into a new area which you wouldn’t otherwise be able to
- You don’t pay them back, as long as terms are met
- Can be time consuming to apply for
- May feel bureaucratic and overly specific or you may struggle to get your business needs to fit into the criteria
- How you spend the loan often carries strict terms. i.e, for capital assets only, high growth projects, staffing costs
- Potentially breaking into a new and larger client-base
- Getting on preferred supplier lists or frameworks which should mean faster procurement next time
- It gives you the chance to really analyse your business during the process
- You have to wait for an opportunity, you can’t drive need – it’s not your timeline
- Can be hard to validate experience and cashflow if you’re new in business
- Potentially risky if you’re over-committed or price too low – check payment terms, VAT, whether you have capacity to deliver before being paid
Sales, Sales, Sales:
- You build a stable customer base and should see organic growth
- Low risk – you sell what you’re good at and you shouldn’t be at risk to over-committing
- Test the market, adjust and sell again
- Speed of sales and lack of high growth
- You may spend your time selling and not delivering or vice versa
- Ability to juggle many hats in business and manage your pipeline
As you can see, there are many options available. It’s really worth spending some time researching which options for funding and investment may be best for your small business. As well as this, a huge job is getting your business plan nailed. So many times, small business owners come to me without a clear and detailed business plan. If you’re looking for investment, it’s imperative you get this as detailed and realistic as possible.
In my next blog – we’ll talk about creating a fabulous business plan and will look at what to include.