It typically takes two to three years for a new business to become stable and profitable. This means that in the early part of your business journey you will need to have access to other sources of funding to supplement your cash flow.
It’s vital that you find small business funding options you can afford, and that which suit your business model. Here’s a selection of 10 popular ways to fund your small business that you might want to consider.
10 Sources of Small Business Funding
The most common source of small businesses funding is your own funds. Before setting out on your entrepreneurial journey, it is well worth building up a buffer of savings from your previous salary, or, if you are continuing to work alongside setting up your business, investing a certain amount of your earnings in the business each month.
2. Equity Funding
Equity is when someone invests money in your company and gets shares in exchange. When your business starts to make a profit, the investor is then entitled to a proportion of the profit equal to their share in the company.
If you only need a small amount of start-up capital, and you can enthuse friends and family about your business idea, they make great first round equity investors.
3. Business Grants
Depending on your business model, you might be eligible for a grant. This form of small business funding is particularly attractive as you don’t have to repay the amount, and it is often accompanied by mentoring and other forms of business support.
Have a look at the UK’s Regional Growth Fund to see which grants are available in your local area.
4. Small Business Loans
If you have a good credit rating and are confident you will be able to pay back the interest, small business loans can be a good option for new business funding. The government backed Start Up Loans can provide entrepreneurs with up to £25,000 at a fixed rate of 6% PA; alternatively, there are many companies offering flexible business loans including larger sums for business growth and development purposes.
The great benefit of this option is that you don’t give shares of your business away to someone else.
In a business context, moonlighting refers to doing another job alongside working for your own company. It’s a valuable option if you need a level of financial security, for example, if you have a mortgage to pay.
6. Start a Crowdfunding Campaign
Crowdfunding is a specific form of equity investment where you seek small amounts of funding from lots of different people, usually strangers, and collectively their investment adds up to the amount you need.
Check out our exclusive interview with Exclusive Interview with Fiona Brinin-Webb on how crowdfunding really works.
7. Home Equity Loans
If you own your own home, you can leverage this asset and release some of the value in the form of a home equity loan.
This is a big risk, because your property is on the line if you default on the loan repayments, but if you are confident in your business proposition it can be a reliable way of raising large amounts of capital. Many high street banks offer home equity loans for small businesses.
8. Pre Sales
Can you make sales without holding physical stock? If so, pre-sales might be a great kind of small business funding for you. In essence, you make sales — and take either a deposit or full payment — from your clients up front.
You then use this capital to purchase your raw materials, stock, or the services you are selling, and deliver them to your customers. It works well if you have a short supply chain and can guarantee getting your product to the client within an acceptable time frame.
9. Trade Credit
Trade credit is a great way to do or start a business with no money. When wholesalers have a good working relationship with retailers, they will often offer trade credit options.
This means that you can take delivery of their goods, and make payment for them later. The terms will vary depending on your supplier, but two common options include a set term (i.e. payment after 30 days) or, less commonly, sale or return.
Even if trade credit is not available to you when you first start your business, it’s well worth requesting as the business grows and you have established your reliability as a buyer.
10. Peer to Peer Lending
Banks are not the only source of loans: your business may be eligible for peer to peer lending. This is similar to crowdfunding in that your supporters will be other ordinary members of the public, but they will give you a competitively priced loan rather than buying shares in your company. Zopa and Rate Setter are two of the most popular peer to peer lending sites in the UK.
There’s no one size fits all small business funding solution: every company has a unique business model and funding requirements. Three questions are very important:
- How much do I need?
- How long do I need it for?
- Who might financially support my business?
These answers will help you decide which small business funding options are right for you.
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