2021 Complete Guide To Financing a Business

Have you recently thought about starting a business and are struggling to find finance sources? Or do you have a business, but want to find alternative ways for financing? In this article, you will find the complete guide to financing a business.

What Is Business Financing?

Many new businesses need help with financing to get them up and running. Even large companies often look for financing to help with short-term deals. Business financing is the method of funding for a business, giving them capital to help with all aspects of the company. The funding can be for starting a business, expanding it or just simply running it.

Finding the right way to finance your business can be tricky and it is important for the long-term health of the company to ensure you make an informed choice. Taking finance from a source that isn’t reliable can be detrimental in the long term and you may eventually be tied to high priced repayment contract or even worse, lose part of your business.

8 Ways To Finance A Business

Government Grants

In the UK, there are different sectors in various locations that have access to government grants which support new businesses. If you’re looking to start a new business but don’t have the funds to get it started, researching government grants would be a great place to begin.

One of the major benefits of government grants is that you don’t have to pay back the money from the grant, as well as keeping full ownership of your company. There are different criteria for businesses that the government can support, so it is always best to do your own research and ensure you are covered before applying.

You can find more information about government grants here: https://www.gov.uk/business-finance-support

BenefitsDisadvantages
Get to keep all of the grant, without having to pay the funds back.Only applies to certain businesses.
Also keep full ownership of your business.Financial support may be less than other sources.

Crowdfunding

A new way to finance your business is through crowdfunding. This is becoming a popular way to find funds for your company and we are seeing more crowdfunding platforms being founded each year.

Crowdfunding is a place for you to pitch your business online to millions of people, showcasing why your business is great and why it should be invested in. You can offer rewards and perks for investors, creating an incentive for reaching your target investment goal.

Crowdfunding can also be used by existing businesses, along with other types of crowdfunding, such as equity crowdfunding and debt crowdfunding. Equity crowdfunding is offering to sell equity in your business for investments and debt crowdfunding is borrowing funds, paying back via investments.

Some popular crowdfunding websites include:

https://www.ukcfa.org.uk/
https://www.kickstarter.com/
https://www.indiegogo.com/
https://www.patreon.com/
https://www.lendingclub.com/
 

BenefitsDisadvantages
All the money crowdfunded will be yours to keep.Lots of competition, so have to stand out from the crowd.
You’ll also keep ownership of your business, unless you offer to give away some for investment.Have to create rewards and incentives, plus no guarantee you’ll be funded.

Business Lending

A way to borrow a large amount would be through a business loan. Companies can borrow from £500 to over £3million through business loans, depending on circumstances and different factors. These funds can be paid back over various lengths of time, from 1 month to 15 years.

Business loans come in all shapes and sizes, with many organisations offering deals and products that benefit businesses looking for particular requirements. It is always best to do your own research and find which business loan works best for you.

There may be requirements when applying for a loan. There may be deals that require little information from you, but these are usually risky. Some companies may have certain factors to meet before you can get a successful loan. Some factors include:

  • Credit score.
  • Updated business plan.
  • Annual revenue.
  • Collateral if you cannot pay the amount back.

BenefitsDisadvantages
Can lend large sums of money upfront.There will be interest fees, depending on who you apply for a loan with, it varies in size.
You keep full ownership of your business.May be turned away from some companies depending on factors such as credit score.

Family and Friends

Many businesses take this option when first starting a business. Opting for support from family and friends in the beginning is a popular concept and can be a great way to include the people you love with the founding of your business.

Funding from family and friends is a good way to get quick funds that are flexible and cut out the middle man. However, the age-old tale of ‘never mixing family and friends with a business’ must be used in this scenario. Always be cautious, as ruining relationships for a business is never, ever recommended.

BenefitsDisadvantages
Quick process of getting funds.Mixing family and friends with business can damage relationships if things go wrong.
Could work out as a great investment for your family and friends.Could impact decisions you make with others inputting opinions.

Business Overdrafts

Similar to a personal overdraft, a business overdraft is an option for people who want flexible lending. Business overdrafts are usually charged interest on the amount you borrow. This figure is typically calculated each day and there are often arrangement fees along with the interest fees.

Depending on who you choose to work with, some companies will offer interest-free overdrafts for various amounts of time. This is usually only for a year with most companies. Overdraft limits are dependent on your business finances and other factors such as credit scores. The more established your business is, the higher you can expect your business overdraft limit to be.

BenefitsDisadvantages
Lending is more flexible than other options.Interest and fees will apply, these can range in price depending on the company.
Keep full ownership of your business.Usually, overdrafts are for smaller amounts.

Angel Investors

Angel investors may not be a common term; however, they are a popular way to get some funds for your company. Angel investors give you funds towards your business, but in return, they’ll receive equity in your company.

These funds may not be used however you’d like to. Some angel investors will specify where the money is to be spent and what area should be invested in. Angel investors won’t take over the running of the business, or make decisions on the company, but they will specify what area of the business their financial investment will be spent on.

An example could be that the investment funds are to be used to buy a new manufacturing device, but cannot be used to buy more inventory materials. Also, you’re not guaranteed how much you will receive, just the amount the angel investor is willing to put forward.

BenefitsDisadvantages
Doesn’t cost anything to your business.There could be restrictions on how the money is used for your business.
You don’t have to repay the investment funds back.Equity will be lost in the business.

Venture Capitalists

Venture capitalists will usually add a larger sum of money towards your business, but in return, they would receive larger equity in your company. They are similar to angel investors, but on a larger scale.

Venture capitalists are usually experts in their industry and can add their knowledge to help your business expand in a shorter space of time. This is so the investor will get a better return on their initial investment.

Usually, venture capitalists will locate companies that have the potential of becoming a big company, with room for plenty of growth. Venture capital is a great way to receive large sums of money for your business, but also the added benefit of gaining knowledge on the industry from an expert and receiving mentoring from people who have been there and done it themselves.

BenefitsDisadvantages
They usually have contacts which can lead to bigger and better things for your company.Often will lead to you giving up a big share of your company.
Venture capitalists can offer advice and expertise to help with the development of your business.Funding can be difficult to obtain.

Business Credit Cards

In the same way personal credit cards work, business credit cards are a common way for companies to finance their business. They are great for making quick payments and for companies with staff who would be paying for business items.

One of the downsides, is that business credit cards are usually available to only businesses that are established and currently trading. So, if you’re looking for financial aid for a new start-up business, you may have to look elsewhere.

Depending on where you look, some credit card companies offer great deals for businesses, such as 0% interest for various lengths of time, some offer cashback and others offer rewards including points on certain memberships.

BenefitsDisadvantages
You’ll get to keep full ownership of your business.There will be interest applied, plus possibly added annual fees.
The funds can be issued to different members of staff.If you need funds quickly, it will likely cost you more.

Notes For Company Owners Looking For Potential Business Financing

All the different options we’ve listed in this article have their benefits, but also plenty of risks. We advise plenty of caution when thinking about financing a business and warn that there are dangers in funding.

Each option should be thoroughly researched and planned in detail before committing to an agreement. It is wise to have a long-term plan for your company and think about where the new investment will be used and how it will benefit your business.

For options that have an interest charge or extra fees, always be sure that you can afford to make the payments back, as you could end up losing more money and your business. Keep on top of your cash flow and ensure to keep up with any payment plans.