It is one thing to have an idea that could lead to a business that generates a lot of profit and a whole other thing getting the capital necessary to turn the idea into a reality. It might be that you have already started a business, but you need extra resources to grow your start up. Whether you are in the first or the second category, this article will make it easier for you to decide on which financing ways you should choose for your business.
Ways to Finance a Business| Their Pros and Cons
There are several ways for financing your business in the UK. Here are a few options:
Savings and Bootstrapping
This is usually the most straight forward type of business financing. If the business does not need much to start, then saving up takes less time and effort. However, if the business needs a lot of start-up capital, one might have to wait for a while or sell some of their personal assets to start. The positive side to this is that you will not have to worry about paying off debts, but then in many cases, you will need to add a second financing method if what you have is not enough.
Friends and Family Support
Another common way of getting finances for your business is by asking for help from close friends and family members. The upside of this is that not every time you will have to pay it back and if you do, then interests are either lower than banks or you get to enjoy no interests at all. However, you might not be able to raise enough from one person unless you have a good well-wisher or rich family member who really trusts your business idea.
Angel investors are in the same category as venture capitalists. They look for small start-ups that have great growth potential and invest in them by buying equity. You can raise substantial amounts from them that do not require paybacks, but this will also mean that you lose a percentage of your equity. Also, some might interfere with the decision-making process of your company.
Government and Bank Loans
Government loans are easy to access but only for small start-ups and those that need small capitals. Their biggest advantage is that their interest rates are not as high as those of bank loans. Bank loans, on the other hand, can be accessed for larger amounts but one has to have a firm return policy since a default in payments may lead to a poor credit score that affects future borrowings.
This works for business accounts in the same way that personal overdrafts work for personal accounts. Interests are higher than long term loans, but one can access them faster given that you do need granters’ approvals before the money is released. The faster you repay, the better as interests build up with time.
Crowdfunding platforms are about 65 in the UK including Zopa and RateSetter. These platforms offer different financing models, some of them being lending and equity financing. You could easily raise a few pounds on these platforms, only that for lending and equity models you have to pay back the amount with an interest.
How to Choose Your Financing Option
It is important to note that not every business financing option is right for all kinds of businesses. Here are three questions you need to ask as you decide on which way to finance your business in the UK will best work for you.
Why you need it
The why question will help you calculate a budget to get the exact amount you need. A business plan will help clear this out. Also, investors ask the why question to make sure that the intention is clear before they invest their money in any business. Asking why helps to know if the money you need is urgent or you can wait a few months before you are able to raise it. If it is urgent, you could go for bank loans and business overdrafts, but if you can wait a while longer, you could consider pitching to several investors.
How much you need
With the amount being clear, you can decide if your savings and family support will be enough or you need a more advanced help such as venture capitalists and bank loans. This will help you choose between government grants and bank loans as well. You can also opt to look for the amount in bits; you get a section of it, then plough back your profits as a way to raise the rest.
How soon can you refund it?
Quick loans, in most cases, need the to be paid almost as fast as they were acquired. For example, overdrafts are paid within a month or two, especially if the borrower does not want the interest to build up. When selling equity, you will not have to worry about repaying the money unless there is an agreement of you buying back the same equity after a while. Bank loans’ return plans are spread over several years depending on the amount.
Before you go for any of the methods listed above for acquiring start-up capital, you need to ensure that your business plan is intact, you have a payment plan for a bank loan and promising returns for investors. If you are not sure, you could consult with a business finance adviser to help you see the bigger picture in a clearer way.