7 Ways to Finance Your Small Business
Updated: Sep 28, 2022
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Running a small business is hard and sometimes you need a little extra cash to help. There are countless reasons why small businesses might need soma additional financial support, from covering a shortfall to pay staff to investing in new equipment or stock.
Whatever the reason, there are many ways you can access money as a small business. In this article, we run you through 7 ways you to finance your small business and offer some insight into which may be best for your own circumstances.
Note: This article offers insight into the types of finance available to small businesses and does not constitute financial advice. If you are looking to secure finance for your business we recommend talking to a professional.
1. Self Funding
The first and most obvious way to finance your small business is with your own money. Almost every small business will receive some sort of investment from its owners in the early stages of its life.
All other forms of business finance make you accountable to someone else, whether you are accountable to pay back the sum of a loan and interest or accountable to make a business generate profit for investors - at the end of the day you end up having to serve someone in exchange for their cash. The major benefit of financing your business yourself is the fact that you are not held accountable by any other party other than yourself and therefore maintain a much greater level of flexibility and autonomy in what you do.
Of course, self-funding your business also means you take on all the risk. If your business fails, you will lose all or some of your hard-earned cash. Self-funding can also drastically limit the amount of cash available and limit the possibility to grow quickly when needed.
Ultimately, most small businesses will use a combination of self-funding and one of the other options we cover in this article.
2. Friends & Family
Approaching your family and friends can be another good way to help find your business. It can also be a great way to help your loved ones benefit from your hard work and success.
One major benefit to borrowing from friends and family is the fact that you will often be able to negotiate much more flexible terms than you would typically receive from other forms of finance. For example, family members may be willing to loan you a sum on a 0% interest basis or for an undefined and flexible period.
The obvious downside to borrowing from friends and family is the fact that you run the risk of losing their money. Also, even when used in a business context, borrowing money from loved ones can ultimately put a strain on the relationship.
3. Credit Cards
Securing a business credit card can provide quick access to cash which can be used in a flexible way to grow your business. Many business credit cards can swiftly be applied for online and are often approved immediately, providing you with an instant line of credit.
Funding on business credit cards usually ranges from £1000 to £10,000. These are a good option for those who want to access a small pot of cash for their immediate needs. If your credit rating is good, you can find these types of cards with generous interest rates.
However, if you plan on borrowing cash over a long period, credit cards can be an expensive way to do this. They are also rarely flexible in their terms, so shouldn’t be used when you are unsure whether you will be able to pay them off within an agreed timescale.
Working with investors is another form of small business finance that you could explore. These individuals or groups will look for promising businesses to invest in, where they believe they could make a significant return on their cash.
Investors can also offer more than just a line of finance. A good investor will have valuable business knowledge and a strong network that they can call on to help support your business. As investors usually put their own money into a business, they will take action to help support business success - this is something you won’t get with other forms of finance.
In addition, business investors can be flexible in their approach and could be a simple way to gain future investments with very little leg work.
Bringing on investors isn’t for everyone. Investors are typically focused entirely on generating profit, which doesn’t always align with the vision of the business owners and employees. Unless your investors are ‘silent’ they are likely to have something to say about how your business is run, which can often lead to conflict.
5. Short Term Loans
Short term loans are an established way to access finances for small businesses.
Although short term loans typically take longer to approve than business credit cards, with internet portals you could receive a loan of £1000 to £500,000 within just 24 hours of your application. Short term loans also offer good transparency of how much you will be expected to pay back and when by, with terms between 3 months and 1 year.
When a small business takes out a short term loan, the owners will commonly be asked to act as personal guarantors. This means that if the business fails to pay back the loan, the named guarantor will then become liable to pay the outstanding amount. For this reason, short term loans are only a good idea if you already hold the cash needed to pay it off.
6. Government Grants
Depending on the type of business you run, you may be eligible for a business grant. Unlike a loan, grants typically do not need to be paid back.
Government grants are made available to businesses that are in need, such as those who are in financial trouble. However, they are also awarded to businesses that are contributing to something that is deemed valuable to society. For example, if your company is undertaking research and development into a project which is considered widely beneficial the government may offer you a loan to cover the costs.
The government may also offer grants to businesses in a specific geographical location to stimulate business and area improvement.
For information on business grants, it is best to use a search engine, type in your geographical area and ‘business grant’ to see which grants you may be eligible for.
Crowdfunding is an increasingly popular way to raise cash for small businesses and projects. Unlike other forms of funding where all the cash comes from one individual, bank or investment groups, crowdfunding relies on a large number of small investments from lots of individuals.
Typically crowdfunding will be used for creative projects or some sort of innovative project. For example, the highly popular crowdfunding platform Kickstarter’s stated mission “is to help bring creative projects to life”.
However, if your project isn’t innovative or creative, you may choose to adopt crowdfunding on a more personal level. For example, you may ask regular customers if they would like to invest a small sum of money to help buy new equipment which will help you serve them better.
Crowdfunding usually doesn’t involve any form of payback of the investment or a permanent interest in the project or company. More commonly, investors will be offered some benefit such as the first run of an innovative new product in exchange for their cash.
Take, for instance, a small local cafe that crowdfunds a new coffee machine. They may offer investors a certain number of future free drinks in exchange for their investment.
Managing Your Finances
Once you have secured your funding and got your small business off the ground, you are going to need to find a way to manage your finances. Of course, you could use pen and paper or even a Microsoft Excel spreadsheet...but unless you LOVE spending time on business finances, you are going to want to find a better way.
There are lots of accounting software online, many of which we have a great amount of experience with. Xero can be a good option, especially if your business finances are complex. However, the Xero platform can be fairly pricey, especially for small businesses and you end up not using lots of features you have paid for.
For small businesses, we strongly recommend using Sage as a more affordable, less complex option.
Funding Your Small Business
There are plenty of options available to small business owners when it comes to financing. Which one is right for you will depend on your circumstances, needs and appetite for risk. Use this guide to inspire your decision making when financing your small business.