Business Funding For Dummies
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Funding for your business comes in all shapes and sizes, and finding the right source of funding at the right time can sometimes be a very confusing exercise and take a lot of work, time and effort. You just have to accept that as part of the process.

It can also be made a little less overwhelming by knowing whether you need to look beyond your own resources and to external sources of funding, and if so, what type and where you might find some useful contacts and information.

Internal business funding sources

As a business owner, you may automatically assume that you need to look outside for funds in order to launch or grow your business and overlook the funding options on your own doorstep or within your business. Before you jump to the conclusion that you must sell shares in your business or approach your less-than-helpful bank manager, it's a good idea to take an internal audit of your own finances and options to raise finance, and see if any of those are appropriate for your business at this time.

Internal funding options may include

  • Friends and family: Friends and family can be a great source of encouragement and your biggest fans when you're looking to start or grow your business. They can also be a good source of cash, and often at more favourable rates than banks or other lenders. You can accept their help as either lenders or equity holders in your business.

    Take care though, because mixing business with family can be fraught with emotion and unrealistic expectations, so as with all forms of funding agree the terms of the loan or investment up front, making sure everyone knows where he stands whether the business is a success, a failure or something in-between.

  • Savings: If you're lucky enough to have some money in the bank for a rainy day or a great opportunity, and with interest rates remaining low, you may want to put your money to work for you. Remembering to leave some money in the bank for unexpected downpours, you can feel a little smug and a lot less beholden to anyone else by using your own money to fund your business. No interest payments, no shares sold and a clear sign to any future funders that you're committed enough to put your own money on the line.

  • Equity from property: You may be fortunate enough to have equity in your house or flat that means you can increase your mortgage and borrow against the value of the property or use it as an asset to pledge as security for borrowing from an online lender or for a bank loan. As with all things to do with the place you and your family call home, make sure you do your research, take advice from a financial advisor and that you understand all the implications involved in this type of finance, which include the possibility that you could lose your home, before you decide to access this type of funding.

  • Redundancy payments: Every cloud has a silver lining, and if you've been on the receiving end of a redundancy payment, it can be a good source of start-up capital to help make your next big idea a reality.

  • Pension release: Recent changes in the rules surrounding pensions mean that at the age of 55 you can tap into a certain percentage of your pension funds, tax free, albeit with many restrictions and an impact on your tax and future pension withdrawals, but it is now an option. I cannot stress enough the need to take advice from a fully qualified financial advisor before going down this route, as there could be serious negative implications if you get it wrong. A good starting point is Pension wise.

  • Credit cards: If you're able to obtain a relatively small amount of money with zero or a very low percent of interest for a limited amount of time, and to pay if off quickly, using a credit card may be one way of getting some funding to put into your business. Be very clear about the terms and conditions of credit card finance, and if necessary, take advice from a qualified financial advisor before going down this route. If you're on a zero percent interest rate, there's a very good chance that you won't be able to repay the debt once that zero percent special offer expires, so be very frank with yourself before signing on the dotted line.

  • Organic growth with minimal or no added funds: If you have the type of business that takes payment before you deliver a service or a product, then you may be able to fund your business from regular trading income. If you have skills or help to create your own simple website, then you may be able to spend a small amount to get your business going, take payment up front or in advance and then reinvest profits back into the business to keep it growing. It's a good option if you're risk averse or on a very tight budget, although it may not be the express train to millionaire status for quite a few years to come.

External business funding options

External sources of funding include banks, crowdfunding platforms and specialist or niche finance companies that help with financing trade transactions or slow paying invoices, as well as equity investors who put money into your business in exchange for a share of the ownership. Some of your external funding options include:

  • Banks and loans: If anecdotal evidence is to be believed, small business loans are hard to come by these days. That's not to say they're non-existent however. There's still money out there and the banks haven't closed shop completely. You need a solid business plan and a clear idea of when and how your revenue will come in before a bank will even sit down with you, though. If you haven't got the assets behind you to guarantee the loan yourself, make sure you ask your bank about the Enterprise Finance Guarantee (EFG) scheme, which the government introduced to help small businesses secure finance. Check Startup Loans for resources.

  • Bank overdraft: If your need for finance is short term or is a recurring short-term need, such as inventory for a fashion business where lead times are notoriously long, and you have recurring revenue and healthy margins, you may be able to secure temporary, short-term finance in the form of an overdraft from the bank you use for your business current account. Be aware that interest rates on overdrafts can be very high, and this type of finance is for short-term needs, but don't dismiss it out of hand.

  • Invoice finance: Invoice finance is a type of debt that involves borrowing against an invoice or a receivable in order to get some cash into your business quicker than your payment terms allow. Once approved, you get a certain percentage of the money due usually within a week, albeit with fees to pay for the service, and the rest when the invoice is settled in full. Invoice financing takes a variety of formats, and can be obtained from your bank's invoice sister company for example, or from online auction platforms or companies that advance their own pot of money. Do your homework and choose the best solution for your business.

  • Crowdfunding: Crowdfunding can take the form of debt, equity or donations, and is essentially harnessing the funding power of the many, as in the crowd, to raise money for your project, business or venture. Usually, you have many investors investing a small amount of money each, but sometimes you have some larger investors in the mix. This type of funding is a good way for you to let you friends, family and other associates get involved in your business. Crowdfunding is usually done using an online intermediary in the form of a platform that uses a sophisticated algorithm behind the scenes. Campaigns, which require a good deal of promotion in your network, on social media and so forth, are created and uploaded with a specific funding target in mind, for a set period of time, and you and your potential investors, can chart its progress online. Most people assume that crowdfunding is suitable only for start-up businesses, but it's also a good way for more established businesses to raise funds and also find a new customer audience. You can find additional information at the Crowdfunding Association website.

  • Business angels: Don't let Dragons' Den on BBC2 put you off considering a business angel as an investor in your business. Most business angels are not of the fire-breathing ilk, but rather on the lookout for a good investment with a strong return – often in something they have some experience of. A business angel can be a colleague, a former employer, a professional in your business network or someone you find through a funding network. They invest cash in exchange for a share in your business, and may or may not take an active role in the company, depending on what you agree. A good starting point for an overview of many angels is the website of the UK Business Angel Association.

  • Venture capitalists: Usually, but not exclusively, for the post start-up phase of your business funding needs, venture capitalists often follow on from an angel funder or step in once your business has a good trading track record. They generally look for a five-year investment in your high-growth business with a significant return on their money. So if you've got big plans and shares you're happy to sell for money and expertise, these guys could be your answer. The British Private Equity & Venture Capital Corporation website is worth exploring.

  • Grants: There are literally thousands of different types of business grants available. The hard part is finding them and getting through the application process, which can be long and arduous. However, if you or your business qualifies, a grant can provide the financial impetus your idea needs to either get off the ground or grow into something bigger and better. More on business grants can be found at

  • Corporate venture capital: Increasingly, large corporations are looking for the next big thing or the innovative start-up that they can invest money in and incubate with resources and mentoring in order to work together to bring something new and exciting to the market. If you've got a great idea and want to explore this David-and-Goliath type arrangement, you could find your business receiving a substantial leg up in the form of office space, finance, research and resources, but you'll also have to be comfortable with not having it all your way anymore. The quid pro quo for working under the wing of a giant is giving up some control and say in your future direction. For more information on corporate venture funds, see the British Private Equity & Venture Capital Association website.

  • Competitions: There's no one source of information on where to find competitions that you can enter and are suitable for your business, but if you subscribe to newsletters and browse business websites, especially those specific to your sector, you're sure to see competitions advertised. You might be a growth company that's able to apply for a high street bank competition that offers a cash prize as well as mentoring from industry specialists; you might be a tech business that can enter a competition to win space, money and mentoring from a tech incubator or accelerator in your area; you might be a business that offers an eco-friendly solution to a city's energy or efficiency problems, and enter competitions in accelerators, foundations, or those put on by corporate sponsors. There are many competitions out there, and not just for start-ups, but the onus is on you to use the Internet, your networks, your industry websites, and your business support and mentoring resources to identify them and apply for them.

About This Article

This article is from the book:

About the book author:

Helene Panzarino is an entrepreneur, educator, mentor and advisor with nearly twenty years of experience helping  thousands of SMEs understand, prepare for, and access traditional and alternative funding options at all stages in their business growth.  A frequent round table participant, media guest, and event speaker, Helene combines hands-on experience with theoretical know-how, and a passion to share this with the wider community.

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