7 Different Funding Options for SMEs
Posted on 23rd March 2017 in The Forecast
Written by Amy Harris
Amy Harris, Founder at FUTRLI, looks at the wide range of choice that now exists for small businesses when it comes to raising much needed funds.
Great business ideas get entrepreneurs hopping out of bed in the morning. But what can keep them from climbing back in for a good night’s sleep is the tricky issue of how to sustainably fund business dreams.
If your ‘worst case’ cash flow forecast shows you’re getting far too close to running out of cash, your hunt for credit will kick in, fast.
However, despite the increasing importance of SMEs to the national economy, traditional avenues of finance, like bank loans, are harder to come by than ever. 63% of SMEs in the EU that apply for a bank loan don’t get the amount they wish.
But thankfully, there are more options than ever for SMEs. From crowdfunding to angel investment, we take a look at the possibilities open to business owners.
1. Venture capital funding
Many entrepreneurs hesitate about venture capital (VC) funding as they can be reluctant to give up equity. But there are many advantages to this route. Besides, owning 100% of a company with no funds is not much use.
A big plus for VC funding is that it doesn’t involve regular repayments like a bank loan does. For start-ups with irregular cash flow this means that any money that comes in can be ploughed straight back into the business. Also, it lowers your personal risk as, unlike with a loan, you won’t have to offer a personal guarantee to the investors if things don’t work out.
Finally, the best VCs will help open up doors and new networks to you, helping to accelerate your growth and putting you firmly on the right track.
2. Angel investors
Angel investors are wealthy individuals who provide capital in return for equity or convertible debt – think Dragons’ Den or Shark Tank to get an idea.
One advantage of this method over VC funding is that you often get a lot more one-to-one support and personal mentoring, especially if they made their money in a similar field to yours. They also tend to ask for lower amounts of equity. On the downside, angels don’t always have as deep pockets as VC backers.
It’s common for angel investors to support local initiatives, so if your business has a particular local angle then it could certainly be an avenue worth exploring.
3. Grants and tax breaks
Thousands of SMEs are missing out on funds by not realising they are eligible for tax breaks or government grants. The UK government is actively looking to support businesses that are making valuable research and development contributions to the UK economy.
R&D isn’t just done by scientists in white lab coats in laboratories, it can be done by a start-up building a new app or an SME finding an innovative solution to a workflow process. Firms like RIFT R&D can help SMEs find out if they are eligible for tax breaks and save them tens of thousands of pounds in the process.
At FUTRLI we see many of our clients benefit this way, and they are often businesses many would not think of as R&D firms. Make sure you explore all avenues to ensure you don’t miss out.
4. Cash advances
The rise of fintech has been fantastic for entrepreneurs. Tech start-ups are constantly building upon and expanding services traditionally the domain of the high street and usually offer them at a cheaper rate and with much less hassle.
Many fintech firms provide multiple services that would usually come from a bank and Swedish firm iZettle is a prime example. It started off by enabling the smallest of entrepreneurs to be able to afford to take card payments and now supplies everything from sales software to quick access to cash. By analysing an SMEs sale history, iZettle offers quick loans that are paid back in regular installments based on the volume of your future sales.
Unlike banks, advances are based on a fixed fee, not interest rates. It’s one more example of funds not available before fintech.
5. Peer-to-peer lending
Peer-to-peer lending (P2P) platforms match SMEs directly with individuals or organisations who are willing to lend money. One of the most well known in the UK is Funding Circle, which was set up in 2010 directly to address the problem of SME funding access. It’s since facilitated over £850 million in loans.
Applicants submit their proposal and investors bid via a marketplace to support the businesses that appeal to them. Loans tend to be quick and made up of many small investments, which is why investors find it so appealing (they can spread the risk). P2P is a model well worth considering if speed is a major factor for you.
Crowdfunding, which allows individuals or organisations to invest in start-ups in return for equity, has become such a part of the mainstream that the Bank of England has claimed UK platforms like Crowdcube are making banks ‘obsolete’. Instead of asking a few people for large sums of money, with crowdfunding you are asking thousands of people for small sums of money.
Entrepreneurs pitch their ideas online to the community, set a target and see if the funds come back in. It’s possible to raise huge amounts in a short space of time.
Other advantages of crowdfunding is it can help get your business plenty of exposure and a wealth of useful feedback. Certainly an option if you are comfortable with putting your idea out there for all to see.
Alternatively, you can bootstrap your way to success. This is all about building a business with no external input and, for some, the digital world has made this route more attractive (and feasible) than it used to be.
So much great software and tools exist to help a driven entrepreneur pull themselves to the top via creativity, smart tech know-how and sheer force of will.
FUTRLI can support you all the way. It is a platform to help you identify when you might need finance and helps you make a robust plan for getting it. Our all-in-one forecasting and reporting engine is designed to bring the future of your business to life visually. You can look at multiple scenarios side by side and it will empower you to collaborate on those numbers with your accountant, bookkeeper, investor, bank manager, and team.
If you want to effortlessly create a 3-way cash flow forecast from last year’s actuals or imported budgets, we can get you started in seconds. Once complete, use our Board templates, like live business plans, as the Actuals will automatically update daily (when you sync with Xero). You can share a Board with your bank manager or print them a PDF.