The traditional banks were once the sole source of capital for small businesses in the UK, but there are now several options available to people looking for cash to get their business off to the best possible start.
1. Debt Financing
Financing a start-up or ambitious expansion plans with finance based on debt is the more traditional option. It involves the borrowing of money from creditors as part of an agreement that stipulates how and when the money will be repaid. There is typically a rate of interest to pay, which is applied to the principal sum and spread across the entire term of the loan. This type of loan can be secured or unsecured, and it doesn't necessarily need to come from a mainstream bank.
Taking on debt to finance a small business provides owners with a degree of certainty surrounding their monthly financial commitments. However, it also means that a fixed payment is required every month, regardless of how well the business is performing. This can put an enormous strain on the cash-flow of start-up companies.
2. Equity Financing
Raising finance through equity involves giving away a portion of a business in exchange for investment capital. This route to funding a small business means that a fledgling commercial venture isn't saddled with loan repayments from the outset. However, it does mean that the organisation or individual who is investing in the business will be entitled to a percentage of the profits on a pro rata basis.
This method of securing capital for a small business is ideal for entrepreneurs with little more than a great idea. Individuals and companies provide this type of finance based on their investment profiles and their tolerance to risk. So called 'angel investors' are wealthy people who often believe passionately in a business or idea, and they will use their own money to get a venture off the ground in exchange for a stake. Venture capitalists are also significant investors in small businesses, but they tend to be more organised and business minded in their approach, and they often work together as part of large corporations and trusts.
3. Grants
Local authorities, charities and the UK government offer a range of grants designed specifically for starting and expanding new businesses. In most cases, strict criteria must be met before funds are released, and there are often restrictions on what the money can be used for. There are millions of pounds in loans and grants available from various different small business initiatives throughout the UK, but competition for this cash is fierce.
4. Home Equity Loans
The equity in a home is the difference between its estimated market value and the total value of the loans secured against it. Business owners and entrepreneurs can often borrow money against the equity in their own home, but the property will be at risk of foreclosure should the owner fail to keep up with loan repayments.
5. Peer to Peer Lending
Traditional banks and financial institutions have made it more difficult to secure finance for new businesses since the banking crash of 2008, and an increasing number of entrepreneurs and small business owners have been turning to peer to peer lending platforms as a result. Peer to peer (p2p) lending cuts out the banks, as it connects savers looking for healthy interest rates with borrowers. P2P loan applications can often be expedited more quickly than those with traditional lenders, and there are usually no early repayment penalties to contend with.
At a time when raising finance for start-ups and expansion is incredibly difficult, owners and entrepreneurs need to know that they have options. With expert guidance from finance experts, small businesses can acquire the funds they need to realise their ambitions.
