Published: 15 May 2023
Last updated: 23 May 2023
Funding is an essential aspect of business growth and development. It provides the necessary resources to fund operations, hire employees, and invest in marketing and advertising efforts. Whether you’re looking for start-up support or an injection of cash to help your existing business grow, having access to the right funding can make all the difference.
It can be daunting to assess the many funding options available for businesses. Especially when each option has its own pros and cons. So, from business credit cards to government funding, here’s a rundown of ways to access funding and the details of each option before making a decision about what’s right for your business.
Why seek funding for your business?
One of the primary reasons to seek funding for your business is to fund operations and invest in growth. With additional financial resources, you can hire new employees, purchase inventory, and expand your marketing efforts, all of which can help your business reach new heights.
Another reason why you may seek funding for your business is to take advantage of new opportunities. For example, you may need funding to develop a new product, enter a new market, or acquire a competitor. Without the necessary resources, these opportunities may be out of reach, and your business may miss out on significant growth potential.
Furthermore, seeking funding for your business can also help you mitigate risk. Firstly, by securing outside funding, you can avoid using your personal savings or taking on excessive debt to fund your business operations. This can provide a safety net and give you peace of mind, knowing that your personal finances are not at risk. Secondly, by having access to additional capital, you can spread out your financial risk and rest assured knowing that your business has the resources to weather any storms that may arise.
Additionally, seeking funding for your business can help you gain credibility with potential customers, investors, and partners. By demonstrating that you have the financial backing to support your business goals, you can build trust and establish your business as a reliable and trustworthy player in your industry.
Ways to fund a business
There are various ways to fund your business, from bootstrapping to traditional banks, government-backed loans, and alternative lenders. Discover the benefits and drawbacks of each option to find the best fit for your business:
Bootstrapping means using personal funds, such as savings, personal loans, or personal credit cards, or reinvesting profits back into the business.
To bootstrap your business, you need to have a solid understanding of your financials and budgeting. It's important to track your expenses and revenue carefully, and to prioritise spending on essential items.
The benefits of bootstrapping include maintaining control over your business and avoiding taking on debt or outside investors. It can be a slow process, but it can also help you build a strong foundation for your business.
Banks are probably the first place that comes to mind when you think of sources of loans. Traditional financial institutions offer a straightforward funding option for many small businesses.
One advantage of using a traditional bank for financing is that they offer relatively low-interest rates compared to other funding sources. However, the application process can be time-consuming, and approval rates can be low. Additionally, banks may require personal guarantees or other forms of collateral to secure the loan.
Business loans from banks typically have higher values, and the monthly repayments are set out from the beginning. However, approval requirements can be stringent and can take a while, so they’re not always ideal for time-critical funding needs.
And that’s if your business gets approved in the first place. It’s estimated that around 100,000 small businesses looking for funding are rejected by UK banks each year.
An overdraft facility on your business bank account is a useful safety net for short-term cash flow issues. But, like personal overdrafts, there are often extra fees involved for going into an overdraft.
The UK government provides financial and development advice to small businesses:
A government-backed Start Up Loan is an unsecured personal loan of between £500 and £25,000. As well as the loan, successful applicants get business guidance, including business plan support and mentoring, but you must meet certain criteria to qualify.
The Department for Business and Trade also signposts those looking for business growth funding to a range of opportunities around the UK that are backed by the UK Government.
An alternative lender is a financial institution or individual that provides loans to businesses or individuals outside of traditional banking channels, such as online lenders, peer-to-peer platforms, and crowdfunding websites.
Peer-to-peer lending, also known as P2P lending, is a type of lending that connects individual borrowers directly with individual lenders, without the involvement of traditional financial institutions such as banks. It is a form of crowdfunding, where individuals or businesses can lend money to other individuals or small businesses through an online platform.
In P2P lending, borrowers apply for loans through an online platform, which then assesses their creditworthiness and assigns a risk grade. The loans are then posted on the platform, and individual lenders can choose to invest in them by contributing small amounts of money. The loans are typically paid back over a fixed period, with interest, and the platform takes a fee for facilitating the transaction.
P2P lending is often seen as an alternative to traditional bank lending, as it can offer borrowers access to credit at a lower cost, and can provide lenders with a potentially higher return on their investment than traditional savings accounts. As P2P funding is typically unsecured, it is easier to be accepted for than traditional lending options, however you’ll often pay a fee to the platform and interest rates can be high.
Crowdfunding allows multiple people to invest small amounts of money into your business, typically through an online platform.
There are several different types of crowdfunding models, including donation-based crowdfunding, reward-based crowdfunding, and equity crowdfunding.
- In donation-based crowdfunding, contributors donate money to a project or cause without expecting anything in return.
- In reward-based crowdfunding, contributors receive a non-financial reward, such as a product or service, in exchange for their contribution. For example, individuals who contribute funding to a bar or pub, may receive a free drink upon opening.
- In equity crowdfunding, contributors receive an ownership stake in the business in exchange for their investment.
Crowdfunding can be an attractive option for entrepreneurs because it allows them to raise capital without giving up control of their business or taking on debt. Additionally, crowdfunding campaigns can serve as a marketing tool, helping to build buzz and attract early customers.
However, crowdfunding can also have drawbacks. For example, not all campaigns are successful, and entrepreneurs may need to invest significant time and resources into creating a compelling pitch and marketing their campaign. Additionally, crowdfunding can be a relatively low-risk way for investors to support early-stage businesses, which may limit the amount of capital that can be raised through this method.
In the context of startups, equity investing refers to the purchase of ownership shares in a company that’s still in the early stages of development. Investors who provide equity funding to startups are often looking for high-growth potential.
Startups typically use equity funding to finance operations, research and development, and other business activities that require significant capital investment.
An angel investor invests in startups or small businesses, usually in exchange for equity ownership or convertible debt. Angel investors are typically high net worth individuals with a strong entrepreneurial background, who are willing to take risks on early-stage ventures with the potential for high returns.
As angel investors are often successful in business themselves, it can be a valuable opportunity for mentorship and support as well as funding.
Additionally, angel investors often invest smaller amounts than venture capitalists, which can make them more accessible to early-stage startups.
However, working with an angel investor can also have drawbacks. For example, angel investors may want a significant degree of control or influence over the direction of the business, which could limit your autonomy.
Angel investors may not always have the same long-term vision for the business as the founder, and may prioritise short-term gains over the company's long-term success.
Venture capitalists usually invest large sums of money into start-ups or small businesses with high growth potential.
Venture capitalists typically invest larger amounts of money than angel investors, and often take a more active role in the management and decision-making of the company. They typically require a significant ownership stake in the company, and may also require a seat on the board of directors. In exchange, they provide not only financial support but also strategic guidance and connections that can help the company succeed.
Business lines of credit
A business line of credit is a flexible financing option that provides a business or startup with access to a predetermined amount of funds that can be drawn on as needed.
Business lines of credit function similarly to business credit cards as they allow a business to borrow money up to a certain limit and only pay interest on the funds that are actually used.
Business lines of credit are often used to cover short-term cash flow needs, such as inventory purchases, accounts receivable, or unexpected expenses. They are also commonly used by businesses that have seasonal fluctuations in revenue, such as garden centres or ice cream parlours, as they provide a way to manage cash flow during slower periods.
The terms of a business line of credit will vary depending on the lender, but they typically have a revolving structure that allows the borrower to borrow and repay funds as needed. The interest rate on a business line of credit will also vary depending on the lender and your creditworthiness.
Working capital loans
Working capital is a measure of your organisation's financial health, and it specifically reflects the amount of money funds needed to fulfil your daily financial obligations. To calculate your business’ working capital, subtract current assets less current liabilities.
A working capital loan is a shorter-term (up to 12 months) loan for small businesses, used to cover day-to-day spending, such as payroll or rent and utilities.
The terms of a working capital loan can vary depending on the lender, but they typically have a shorter repayment period than other types of loans and may require more frequent payments. Interest rates for working capital loans can also vary depending on the lender and your creditworthiness.
Business credit cards
A business credit card is a credit card designed specifically for businesses. Just like a personal credit card, a business credit card allows you to make purchases and access credit on an ongoing basis, up to a predetermined credit limit.
However, a business credit card also provides features and benefits that are tailored to the needs of your business, such as expense tracking and reporting, supplementary employee cards and controls, and rewards programs that offer benefits like cash back, vouchers, or airline miles.
Business credit cards can be issued to both small and large businesses, and may be used to cover a variety of business expenses, including travel, office supplies, equipment, and other purchases. Business credit cards typically require the cardholder to have a good business and personal credit score, and may also require the business to have a certain level of revenue or time in operation.
One of the key benefits of a business credit card is its ability to help businesses manage their expenses and cash flow. Business credit cards are a convenient way to make purchases and pay bills, while also keeping track of your spending and monitoring finances.
The bottom line
The type of funding you ultimately decide on will depend on your business’s circumstances at the time. Different funding sources may suit your needs at different times, but understanding what’s available to you is important.
This does not constitute financial advice. If you want to understand your business growth funding options in detail, you should speak to your financial advisor or accountant.
If you’re looking to grow your small business in a flexible, affordable way, a business credit card from Capital On Tap could be the answer with limits up to £250,000, uncapped 1% cashback on all spend, and £0 in fees.