The Government really, really wants you to start a small business. (Not that they are that helpful once you have but that’s another topic!) Take a look at the list of funding options available here. Many are regional, and many won’t apply to you, but it it’s worth seeing if there’s an option that fits. In practice start-up loans are probably going to be the most useful. The downside is that funding can take ages to secure. Well, it is the Government after all.
Banks have backed away from lending to small businesses, but there is still help available. Business loans are more expensive than personal loans and it isn’t always easy to make comparisons because the rate depends on how risky the bank deems your business to be, but for those who can get them, they are a predictable source of funding.
The drawback of a bank is that they can be slow to give an answer and their decision-making can be opaque. It’s not always easy to see why they said no.
Peer to peer/Crowdfunding
Your funding options aren’t limited to the high street banks. Increasingly, other groups are stepping in to fill the void that banks have left. Crowdfunding is perhaps the most high profile example of this, with groups such as Kickstarter and Crowdcube now well-established. With crowdfunding, people simply pledge a donation or may receive a stake in the business in return for their investment.
Peer to peer lending groups, such as Funding Circle, bring together lenders and borrowers. Lenders say how much they want to lend, to whom and at what rate, while borrowers say how much they want to borrow, for what and for how long. The two meet somewhere in the middle. Funding Circle claims to have lent some £1.5bn since its launch.
Peer to peer lending is not necessarily cheap (though in practice it may not vary significantly from bank lending), but it is quick. Borrowers can often get an answer in days and the funds within a week. This can make a material difference to your cash flow position. Just read the terms and conditions very carefully – it’s a different game to the traditional model and there’s no such thing as a free lunch.
Asset finance is simply a loan based on an asset. This could be a second charge on a property, premises or equipment. As with a mortgage, you risk losing the asset if you can’t repay the loan set against it. Asset finance can be difficult to arrange and expensive, but may work for asset rich businesses, such as those with lots of plant and machinery. There are intermediaries who can help you, but it can be a murky area, so proceed with caution.
The backing of an ‘angel’ investor can be manna from heaven. Not only do you get their cash, you also get their credibility. Often, where one angel investor goes, other investors will follow and a business can see a virtuous circle. They may also be a source of good advice – most angels are seasoned entrepreneurs themselves.
Angels are active on the crowdfunding platforms, but there are also networks you can tap into. Angels even have their own Association. Probably best to avoid Dragon’s Den – we’re secretly not convinced most of them ever invest!!
Tap up your family
It’s an old one, but still one of the best. If you can’t raise money anywhere else, try your family or friends. They love you, they believe in you. The only problem is that Christmas could be a bit uncomfortable if it all goes wrong! Try and put aside your rose-tinted specs and be realistic about what the chances of it going pear-shaped are.
Finally, it’s clearly very risky putting all of your eggs in one business basket. Many small businesses sadly do go under. It is worth having that conversation with your partner and your family before borrowing to fund a business. Talk through the ‘worst case’ scenario. Sometimes the gamble is not worth the cost. What’s truly motivating you? Could you achieve a similar outcome with a less risky route? Is there a ‘half-way house’ which is a bit less risky? How much do you value the ‘status quo’ and your lifestyle today? These are really hard questions but sometimes, when we run a business, we get blinded by our determination and it’s really helpful to set aside some time for a hard think about what’s actually at stake.