Financing Your Small Business

Starting a new company is a brave move but a popular one. According to research, almost one in five of the workforce would like to start a business or a side. ¹ Statistics show that 753,168 new start-ups were founded in the UK between March 2021 and March 2022 ² SMEs account for 99.9% of the UK’s business population³ – a clear indication of the important role small businesses contribute to the economy.

Regardless of your chosen profession, it can be a costly process – the average cost of starting a new business – one that’s not home-based – is £12,601.⁴

The ideal situation is for a start-up to be self-financed. However, this isn’t always possible, with professional fees, premises costs, staffing and employment, equipment and supplies, stock, and marketing to consider.

If you're taking the plunge and need extra finance, there are three main routes to consider.

Loans

Traditional small business loans are still some of the most viable methods of funding a start-up. They are applicable across a whole range of industries and still represent a straightforward transaction: the funds are borrowed to cover some costs, then paid back later with interest.

Debt at the start of a business journey does not have to be as scary as it sounds. Good lenders will schedule a repayment plan that works best for your business. Traditional banks and buildings societies are sometimes a little less flexible. Government start-up schemes⁵ and enterprise loans can often step in and support smaller businesses. There are several grant schemes available in specialist professions such as the arts and technology.

Equity Funding

As shown (in dramatic fashion) on “Dragon’s Den”, equity funding involves start-ups pitching for funding from investors and offering a stake in the business in return. It’s a gamble on the part of the investor. If you’re pitching you will need to make a strong case, so use as much market data as possible. Demonstrate your knowledge of your customers and show that you are a reliable investment with as little risk as possible.

The downside of this approach is that you are relinquishing some control of your business. The upside is that an angel investor can provide expertise and mentorship, adding extra value to your operation that goes beyond financial support. There are networks⁶ of angel investors all over the UK.

Crowdfunding

Bulking out savings by borrowing from friends, family, and strangers has been a tried and tested route for entrepreneurs for many years. This has now been formalised and targets potential customers as well. Platforms such as GoFundMe ⁷allow you to control the amounts requested and sometimes provide great publicity to help kick off a business.

Before looking at any type of funding, it’s essential to have a good business plan prepared. Consider your financial projections, get proof of business contracts and forecasted sales. Be clear on how much funding you need and what you will be using it for – and keep reviewing all your numbers, to keep them up to date in line with external events and influences.

Just over a third of UK start-ups survive beyond five years. ⁸ The key is to apply sensibly and then use your funding wisely in order to start strong and then build your business for the long-term.