There are two ways to really grow your small business; the hard way and the easy way.
The hard way involves exploiting all of your personal resources, that includes time and money, and expending them on strategies you believe will help your business grow.
The easier way, however, is by accessing the mountains of capital that exist to accelerate your business growth. This is an easier route because not only do you limit your own personal risk, but you can also access a huge amount of expertise that can assist in your business’ growth.
A prerequisite that will help you unlock the funding resource is a sound business plan to let funders know what you and your business are all about.
How Raising Money Can Help Your Business
Businesses fail because of a lack of cash. As a result, the principal way in which you can guarantee a future for your business is by ensuring that there is sufficient capital in the company.
In addition to this, access to money can help you build your products quicker (or build new products or services); it allows you to market your business more effectively; and allows you to build a team that can help you scale.
A number of well-known businesses today were started with different funding amounts and have gradually raised funding to get to where they are today.
Getting to scale is often a key stumbling block for many businesses because although they get to the stage of having a proven business model (i.e. paying customers), getting to a critical mass requires a different skill-set, and access to capital.
There are an increasing number of sources of funding that have made raising money for your business easier than ever before.
The range of types of funding means there is a funding solution for any type of company, in any stage of its lifecycle.
Let’s have a look at some of the funding options you should be considering right now.
Different Types of Funding
There are typically three types of funding;
Debt funding is what is commonly known as a loan that you may take from a bank, for example.
A loan typically needs to be paid back and accrues interest over the term of the loan that needs to be paid by the company through its own cash flows. The lender does not take an equity stake in your business nor do they have a say in how you run your business.
Equity funding is where an investor invests in your business in return for a share in the business. The size of their share will be dependent upon their view of valuation of your business. There are typically no interest payments due.
Equity investors may also want a say in how parts of your business are run, as such, they may take a seat on the Board and will want to be updated on a regular basis.
Asset funding makes use of the existing asset base of a business. Clearly this will not work for all companies – only those that have tangible assets.
The logic is that assets in a business (in whatever form) are used as collateral for a cash advance to help the business grow.
Grant funding is ‘no strings attached’ funding. Typically such funding is from government initiatives to help stimulate the local economy and grants are available for specific sectors or for particular locations.
Due to its nature, the amount of funding you have access to in the form of grants is smaller than debt and equity funding, however it does give entrepreneurs more freedom and is less of a strain on existing cash flows.
Sources of Funding
The different sources of funding are outlined below.
Private lenders are increasingly popular to help support startup businesses in all sectors. The misconception amongst many entrepreneurs and those looking to start in business is that unless you’re a tech startup, you cannot get funding, and fewer opportunities are open to you.
This cannot be further from the truth.
In many instances, private lenders represent the most convenient way for most businesses to start their operations.
One of the main private lenders in this space is My Business Funded. These guys are able to lend to businesses that are as little as six months old and who only have low monthly revenues.
The forms of restrictions that exist with other types of lenders do not exist with private lenders such as My Business Funded and the Lending Club, which makes such sites some of the quickest growing business funding websites around.
2.Small business lenders
There are a lot of businesses that will be interested in lending to small businesses such as yours.
A simple search in Google for “small business loans” will lead to
There are over 48 million results for this search term alone!
More conventional small business lenders require collateral against the loan in the form of assets. Interest rates would vary depending on the nature of business.
When considering taking out a small business loan it is important to really understand the interest repayments you will be asked to make as interest repayments have a direct and real impact on your cash flows.
Many of you will be familiar with the Small Business Administration that has a range of initiatives and programs to help support the small business community in the US.
As with most types of loans, those from SBA will also require a guarantee against the value of the loan.
The video below shows one of the SBA’s most popular loan programs to startups and small businesses.
4.Peer to peer loans
According to Investopedia, rigid and time-consuming procedures of traditional banks have unknowingly paved the way for an industry that has grown tremendously in less than a decade.
The peer-to-peer lending marketplace, popularly known by the acronym P2P lending marketplace, works through a simple online platform, which connects borrowers and lenders, thereby cutting out the traditional banking protocols.
The P2P platforms do not lend their own funds but act as facilitators to both the loan-seeker and the loan-giver.
There are many P2P platforms operating globally and it makes sense to explore platforms local to your business or country. However, this article conducts a comprehensive review of the main P2P lending sites.
There has been a surge of microloan institutions across the US and globally over the last few years to help small businesses with funding.
Microloan startups have been started to help address this problem.
Kari Luckett of CompareCards.com explains more about microloans by saying
Microloans started as a solution for impoverished borrowers in underdeveloped countries. These borrowers typically lacked collateral, steady employment and a verifiable credit history, making them a difficult candidate for traditional financing options. Microloans have been successful in helping to support entrepreneurship and encourage economic growth in these developing nations.
In more recent years, microlenders have been establishing themselves across the US.
Luckett goes on to say that there are now almost 1,100 microfinance institutions that collectively serve more than 74 million borrowers with $38 billion in loans.
A good example of a microloan lender is TrustLeaf and a visit to their site demonstrates how simple and straightforward it can be to arrange a microloan.
Once the obvious choice for funding, bank debt is still the right answer for some businesses. Banks are still keen to fund businesses that are well run and have a strong track record.
Bank debt is not for everyone though. Ideal candidates are typically businesses that have assets that can be used as collateral. In addition, businesses that have proven performance over a period of time would also find it easier to convince lenders of their fundability. Consequently, earlier stage businesses would struggle.
Banks are sector agnostic and so would consider funding companies in any sector. Bricks and mortar businesses such as restaurants and florists are ideal candidates.
Credit card debt is obviously another form of bank debt and shares those characteristics in that it needs to be repaid with interest.
Using your credit card is a high-risk strategy as credit card debt is not cheap and interest rates can be high.
Entrepreneurs have typically used this as a short-term form of finance whilst other solutions are pending.
Crowdfunding is, as the name suggests, a form of equity funding that is made available to entrepreneurs by groups or “crowds” of people who believe in some way or other in the business of interest.
The basic premise is that Joe Public has the opportunity to own a small stake in a business, in return for a capital commitment.
Variants of pure equity crowdfunding campaigns exist that allow consumers to effectively fund products or ideas, before they are even manufactured. In this scenario consumers get their hands on the product at a discounted rate or get access to a special edition of the product.
The funding amount varies but businesses on crowdfunding platforms have been raised more than $25m, making this a serious funding contender for certain types of business.
What can investors get in return? Well it can range from equity to credits in a movie, or discounted and early access to a product.
Creativity is key when it comes to such investors.
9.Angel and seed investors
These are early stage investors and can be actual funds or high net worth individuals (HNWI’s).
Angel and seed investors are, as the name suggests, investors that look to fund businesses at the outset of their journey. In other words, they will fund the business with a small amount of funding to help validate proof of concept.
They are typically high net worth individuals. In other words, very rich people!
These guys may have made their money from their own business in the past and are keen to help support other entrepreneurs in growing their business, whilst looking to make a return on excess capital they have.
The value from an angel or seed investor comes from the fact that they have business expertise. As a result this is smart money in that not only do you get access to the funding, but you also get access to the experience and network of the investor.
However, such investors will typically only invest in businesses in sectors that they have worked in themselves. This is because this helps them to mitigate their risk by not investing in something they don’t understand whilst allowing them to add most value.
Although angel and seed investors can add a lot of value, they are typically happy to stay hands off and allow the management team to run the business.
Local and regional business events are a good place to network with such investors and build a relationship.
A venture capital fund is where you would look to if you have raised initial funding but want to look to raise additional funding and take advantage of the collective expertise of individuals who know your sector.
Venture capital funds get their money from pension funds and hedge funds etc. These funds trust the venture capital fund to invest in businesses with the most likely chance of success, hence to make a return for all investors.
Search out venture capital funds for your sector by trying out Google searches such as the ones I have tried out below for non-tech sectors.
For the food sector.
For retail businesses.
For the health and fitness space.
Asset finance is good for companies that have assets because it is a form of funding that involves borrowing against assets you already own.
Assets are typically equipment and inventory that the business has.
The principle of asset finance is that certain types of funders will be willing to lend money off the back of actual value in your business.
The assets you borrow against are effectively held as collateral over the term of the lend.
Asset finance companies have been set up specifically to cater for this funding channel and you will have to do some research to understand the right asset finance company you should work with.
Invoice financing is a form of asset finance but instead of funding against the actual assets in your business, you are securing capital off the back of the invoices of the business.
Hence, if you’ve billed a customer but have not received payment yet, you can borrow cash against that invoice or even sell the debt on.
As with more general asset finance providers, it is important to identify the right invoice finance company for your purposes.
Some of the things to watch out for when finding an invoice finance partner are:
- The proportion of each invoice that will be advanced by the finance company
- The charges associated with each provider
- The fit of a provider based on the nature of your business
There are a number of other things to think about before embarking on invoice financing as a funding source. Getting the provider right is important as you will be working with them very closely.
13.Leasing and hire purchase
To help grow your business, it is likely you will need to make significant investment in new assets.
This could include new computer systems, new software, machinery or other equipment.
Hire purchasing and leasing allows you to break down the payment for the assets into monthly instalments.
This is a godsend for a small business because it makes the purchase more affordable and limits the impact on your cash flow.
To clarify further, with leasing you are paying for the use of an asset but do not own it at any point. You are typically required to provide a deposit. It is simply the process of making monthly payments to make use of an asset.
With leasing you avoiding the one-off cost of having to purchase the assets as a whole but you never actually own the asset yourself; you are simply paying to use it.
Hire purchase is different in that once a contract period is fulfilled, you are the owner of the asset.
There are many advantages of hire purchase and leasing, and again, is not right for every business.
However, it can dramatically open up options for some businesses to help them grow quicker.
A cash advance, or merchant cash advance, is when you as the business owner get an advance on your future credit card sales.
This advance is paid off by the company that provides the advance taking a percentage of each credit card transaction until the agreed upon amount has been paid back to the advance company.
When considering cash advances it is important to consider the interest rates you will be paying as they can be quite hefty.
Factoring is another of the funding sources that make use of the assets or inherent value of the business.
Factoring allows a business to sell their invoices, or accounts receivables to a third party for a certain percentage of their total value.
We’ve spoken about invoice financing before, but factoring is more expansive in how it can be used, especially with regards to your accounts receivables.
The ‘factor’ pays a portion of the invoice very quickly which is the real attraction of factoring compared to, say a bank loan. Sometimes this can be done in as little as 24 hours.
Then the factoring company collects your customers’ payments and forwards the remainder on to you, the business owner, minus its service fee.
16.Business accelerator funding
For early stage businesses in certain sectors where there is the scope for disruption (typically technology companies, though not always), accelerators have been formed that support these businesses through the rapid growth phase.
Larger companies such as Microsoft or Cisco or others typically support these accelerators.
The idea of an accelerator is that businesses apply through a competitive process to secure a place on an accelerator for a fixed number of intakes every year in a limited cohort.
Once part of the program, they go through a mentoring period, typically of three months. In this period of time they get access to working space, and talents of people who have been there and done that.
There is usually a competition at the end where judges assess the quality of the businesses as a result of the support they have received over the previous three months.
I myself am a mentor and judge at the Mass Challenge business accelerator.
The winners receive funding amounts and continued support.
This can be a great funding source for certain businesses because not only do you get access to the funding, but you get support and guidance from experts in your field.
Governments across the world, and especially in the western world, have been championing entrepreneurship as they realise it can stimulate the economy through the goods and services that are sold, and the jobs that are created.
As a result, many local and regional governments have initiatives aimed at local entrepreneurs and support them through grants that become available throughout the year.
These grants may be for specific types of businesses, or businesses of a certain size. There will be a government-funding grant available for most types of business.
Unlike debt and equity funding where the providers require something in return, with government grants that’s not the case.
However, you do have to apply for this funding and because of its nature, it is extremely competitive.
Partnering up with larger corporates in your space is increasingly becoming attractive for certain types of business.
The idea is this is a mutually convenient relationship where your business gets funding and support, as well as potential cross-sell opportunity with the larger corporate partner whilst the larger partner is able to benefit from the kind of product or service you offer.
As you can see, there will be very specific use cases for this funding solution as it is important the corporate partner can also get something out of the relationship.
A good example of this may be in the use of software.
So if your business develops software that automates a certain task or process, this is something that could be of interest to the right corporate partner.
This requires research to your specific business and reaching out to the relevant corporate partners because even if they don’t explicitly state they venture with smaller businesses, they may well do.
In addition to corporate partnering, some businesses get funded by building relationships with other partners in their ecosystem.
This could be suppliers, distributors, or even customers.
This funding channel very much depends on the type of product or service you offer and the relationships you have with your key stakeholders.
Customers, for example, may be happy to pay upfront for a product that is not yet built, similar in some ways to how crowdfunding works. However, increasingly, there are larger number of business owners who are identifying their target market and seeking their financial support, or part of it, before even building a product or developing a service. This is particularly prevalent in the realm of online products.
The model that prevails in the film industry ensures that distributors put up a significant amount of capital before a film is even released to secure certain rights. Satellite companies may also secure their rights before a release. This funding can then be used to market the upcoming film more aggressively.
With this funding option, it is important to be creative and tap your stakeholders for a deal that gets you funding early on, and delivers preferential terms or conditions to them.
Despite being naturally ignored by many as a viable funding option, bootstrapping is a strategy that more businesses could benefit from exploiting.
One of the basic tenets of business is to keep expenses realistic to your budget. It is all too often too easy to listen to the bravado that comes with mantras such as “you need to spend money to make money”, or “go big or go home”.
But the reality is, especially in the early days, it is important to scale slowly and get rid of excessive expenditures.
This is called bootstrapping i.e. relying on the business’ own cash flows to grow the business.
Strategies you may employ to bootstrap could be working from home as opposed to from an office; delaying unnecessary capital purchases such as that fancy coffee machine; negotiating fees strongly with suppliers and distributors; and using contractors or interns instead of hiring heavily at the outset.
Bootstrapping must be used with care, because although there are many benefits, there are also the downsides, namely, a limit on how much you can grow.
21.Friends and family
Finally, the funding source most of have access to readily, though with varying strings attached, are friends and family (also known as friends, families, and fools).
These are the people who know you and who trust you. So they may also be the people who will most readily be happy to fund you, especially if they have some spare cash under the mattress.
Many great businesses have been built on securing initial capital from friends and family. When he set up Amazon, Jeff Bezos secured initial funding from his parents.
Although friends and family can be a very important option to use early on you need to use with caution.
Mixing money with your nearest and dearest can easily lead to troubles that an entire lifetime cannot solve. So it is extremely important you are clear upfront with the risks involved, and ideally only approach those who would be willing to lose the money if it came to it so you can save your relationships.
Building and growing a business has become much easier due to the range of funding sources that have become available. Visionary and ambitious entrepreneurs no longer have to risk their personal wealth to make a go of their business.
There is a funding type and solution for every type of business out there that caters for need and your particular risk profile and this covers debt, equity, asset and a range of other funding options.
The onus is on you, the business owner, to identify and make use of the right funding solution for your circumstances to give your business the right opportunity for success.
If you would like to know the best way to approach any funder for them to consider investing in your business, then download my cheat sheet by clicking the button below.
Are there any funding sources that I’ve missed out? I would love to hear your views in the comments below.