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How to Finance Your Small Business: The Products Edition

2021 07 21 finance ur biz products

[5-minute read]

You’ve had a great idea. You’ve researched it, completed a business plan, P&L, cash-flow statement, and all the other kinds of statements a new business might need. All that’s left to do is… getting your hands on some dosh.

Alternatively, you’ve grown your business steadily. Everybody in the village is wearing your shoes, not just your mum. It’s time to spread your wings and explore markets beyond your borders. But you don’t have any extra capital to invest. What do you do? Sell your house? Get your poor mum to invest or some Plonker down at the pub? It’s an option, but there are many others you might want to consider.

Firstly, remember that whatever you lend, you have to pay back some time, with interest. Whatever you give away – like shares – you have to provide value and a return for your investor. In reality, you have to give something to get something. It’s the law of the universe, and it’s no different in business. There are, however, clever ways to go about it – ways that will inject your business with short-term capital and valuable expertise over time.

Let’s look at some of the options open to you.

1. Personal savings

Many small business owners rely on their savings to start small businesses. Some words of advice: don’t drain your savings to fund your business. You should set aside living expenses (rent, groceries, etc.) for at least a year. Many startups take a while to start showing a profit and you don’t want to end up on the street while getting there. Some people choose to invest their pensions into starting a business. The Guardian published an interesting article on pension entrepreneurship. They’ve found that there has been a significant increase in employment patterns where around 4.6 million people work for themselves. Common practice is to invest 25% of your pension in your new business and leave the other 75% income-bearing so that you can continue living from it. Don’t invest your whole pension in any business! And when you invest, make sure it’s income-bearing.

2. Personal loans

There is always the option to borrow from your family and friends. Remember, family and business don’t always mix well. If you decide to go down this route, put everything on paper – in contracts – and get a lawyer to draw it up. It’s just good housekeeping and will avoid family feuds later if your castle in the sky turns into a wendy in a caravan park.

3. Bank loans

Banks are generally a tough nut to crack. They require an airtight business plan and excellent credit scores before they even look at your application. They might also demand that you invest your own money before they do. And when they do, they might lend against security, like your house or your pension. Needless to say, tread carefully; remember the wendy in the caravan park? Luckily there are many other support structures and investment options available. If you don’t have assets to borrow against, try speaking to your bank about getting an advance or cession on your debtor’s book. It basically means you get an advance from the bank against orders with purchase order numbers. It comes at quite a high price though and it’s obviously only applicable to existing businesses that want to expand.

4. Grants

You’re in luck. The UK is a global leader in embracing entrepreneurs. The Pitch powered by Sage published a comprehensive article summarising various government support structures, both locally and nationally.

LEP’s (Local Enterprise Partnerships) are public/private partnerships that provide support across 38 growth hubs across the UK. Businesses can connect with their local growth hub to access funding, advice and support.

To find support for your business nationally you can go to GOV.UK. They provide different forms of support through 157 listed schemes. Your business can access almost anything from finance to grants, equity, loans, expertise and recognition awards on the site.

5. Angel investors or venture capital

Banks are quite ironic. When you have money they want to give you more. When you need money they refuse to lend you any because the risk is too high. Angel investors are a different kettle of fish. They like risk, as long as they can benefit from it. They’re normally attracted by high-growth companies with good cash flow. Before you even think about finding an investor make sure you’ve aced your business plan or that you have a decent pitch deck. Bplans has an insightful article on the ins and outs of pitch decks and business plans. The The Angel Investment Network is responsible for the development of angel syndicates across the UK. Head on over to these sites with a cuppa. You might come away with an angel.

6. Crowdfunding or crowdlending

It works the same as angel investors, except that the money comes from a crowd, not an individual investor. Some of the crowdfunding websites offer the option of “selling it forward”, where people buy your product with pre-orders before you’ve made it. That way you can access the capital to produce your groundbreaking idea. Needless to say, you need to make the product with the money. At the heart of all the crowdfunding and lending campaigns is a succinct ‘elevator pitch‘. It’s basically a summary of what your idea is, how you want to execute it, what the benefits or potential income would be for any investor, and why they should spend their children’s heritage on making your idea happen. Companies normally have a target amount they want to raise. If you get there, you get the money. If you don’t, well… you don’t.

Some of the most popular crowdfunding platforms are Crowdcube, Kickstarter, Indiegogo, AngelList, Kiva Zip, and Accion. They all cater to different kinds of businesses and have different fees. You’ll have to do some research to find the investors that will take your idea and give it wings.

If you sell a service like web design or photography, your timelines to get funding are quite different to companies that produce products. We’ll discuss funding avenues and how fast you can access them in our next blog post.

Did you learn something from this quick read? Would you like us to explore some of these digital tools in more detail? Tell us on social media: Facebook, Instagram, Twitter and LinkedIn.

P.S. Looking for a comprehensive payments solution that will get you paid anywhere, any time? Get Truevo. We can’t wait to connect with you.

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