Managing a small business often involves significant financial demands. Whether you’re grappling with increasing operational expenses or aiming to introduce a new product that requires additional capital, don’t hesitate to seek assistance!
In this guide, we’ll be exploring the different types of funding available for small businesses and which is most appropriate for your business.
Bank Loans
Bank loans and overdrafts are a popular choice of funding for many small business owners. Conducting research on the various types of bank loans and lending facilities available will give you a better insight into which option is the most suitable for your business.
If you find that the interest rates are too high or anticipate challenges in repaying the loan, it may be wise to explore alternative options. After all, you don’t want to risk jeopardising your credit score or putting your business under financial stress.
What Do I Need to Apply for a Bank Loan?
Every bank is different, but most typically ask for the following documents:
- Trading accounts
- Your current business plan
- Financial reports, including your profit and loss statement
- Cash flow forecast
- Details on how you intent to use the loan
As applying for a business loan can be an admin-heavy process, we recommend preparing these documents in advance to facilitate a smoother application procedure.
Merchant Cash Advance
If you’re seeking short-term funding, a Merchant Cash Advance could be a more suitable option for your SME. With this, the lender provides an upfront sum to your small business, which you’ll repay through a percentage of your card sales (fees may apply). Eligibility often requires accepting both debit and credit card payments.
Angel investors
An angel investor is an individual with a high net worth and the financial means and resources to contribute to your business’ growth. These investors are often actively engaged in the day-to-day operations of your business, providing valuable guidance.
This involvement is particularly beneficial for startups requiring additional mentorship. Angel investors expect a return on their investment, usually in the form of an equity stake.
Crowdfunding
Crowdfunding involves individuals or investors contributing smaller amounts of money to achieve a larger funding goal. Familiar platforms like GoFundMe cater to both private individuals and businesses.
This method is ideal for specific projects or products that require fundraising. It also serves as a means to pre-sell products, securing capital in advance for production.
Many crowdfunding platforms offer the option to provide updates, allowing investors to track progress and potentially contribute more.
Grants
Grants are typically awarded to businesses to facilitate their growth, but it’s crucial to understand the nuances of different grant types. Some grants may require you to contribute up to 50% of the grant value before disbursement.
Start-up Grants
If you’re in search of funding, you’ve likely encountered “direct grants,” the most common form of government grant. These grants often cover essential aspects of business initiation, such as staff training and equipment. Stay informed about the latest small business grants by checking the GOV website for direct government grants.
Matched Funding Grants
In this scenario, you present your project to entities like trusts, social banks, or other social organisations. If granted, they will “match” the funding you’ve already secured from other sources. This approach is particularly popular among nonprofit organisations.
Dedicated Grants
These grants are earmarked for specific purposes or projects, such as office renovations or business area expansions. It’s essential to spend every penny of the grant on its designated purpose. Deviating from this could result in non-compliance; for instance, using a dedicated grant for office equipment on marketing would not be permissible.
Always review the terms and conditions before applying for a grant to ensure eligibility and a clear understanding of any associated rules or regulations.
What’s the Difference Between a Loan and a Grant?
In straightforward terms, a loan is an amount you repay, typically in a predetermined number of instalments. On the other hand, a grant is a sum you retain, and there is no obligation to repay any part of it.
Grants are generally funded by public sources and bestowed upon businesses by entities like the government, charitable organisations, or trusts. Loans, however, often come from private lenders, such as banks, which impose interest charges on the borrowed amount, specifying both the interest rate and the repayment duration for your business to fulfil.
How to Prepare a Funding Application
Before approaching an investor or applying for a loan or grant, it’s crucial to be well-prepared. The last thing you want is to pitch without essential documents or have the bank request financial statements you haven’t organised. Follow these tips to ensure readiness for various funding scenarios, whether it’s securing a bank loan, presenting to an angel investor, or applying for a direct grant.
Develop a Comprehensive Business Plan
Regardless of the funding source, a robust business plan is essential. For instance, if you’re seeking a grant to support business expansion, your plan should outline the strategies for achieving that objective. If pitching to an angel investor, include future plans and revenue projections to demonstrate the investment’s viability.
Familiarise Yourself with Terms and Conditions
Before applying for a grant or loan, carefully review the terms and conditions. Avoid wasting time on applications for which you don’t qualify. For instance, some matched grants may require a specific amount of your own funds, or a government grant might be designated for businesses in a particular district. Focus your efforts on opportunities that align with your eligibility.
Have Financial Reports Ready
Investors, banks, and organisations typically request financial documents to assess your business’s performance and future outlook. Ensure you have the following reports ready:
- Financial reports or management accounts
- Financial forecast
- Cash flow forecast
Utilising good bookkeeping software can facilitate the creation of these reports. Regularly reviewing and monitoring your business’s financial health will also help identify areas of success and potential challenges.
Keep in mind that different funding options warrant varying levels of consideration. Opting for a bank loan entails evaluating interest rates, whereas launching a crowdfunding campaign may involve providing rewards to investors.
Get Help with Sourcing Funding with Ryans
Every decision made within a company has some form of financial consequence. Whether you are looking to increase your sources of finance, get rid of aspects of the company that drain it or do both, we can help you to identify these and make informed decisions that are best suited to your business.
We can help you:
- Conduct a feasibility study of your projects
- Decide on the most suitable sources of finance – personal capital, bank overdraft, long-term commercial loans and mortgages, national and regional agencies, venture capital, or equity capital
- Prepare the necessary business plan, forecasts, prospectuses, etc.
- Present your proposals to your chosen finance source
- Arrange a disposal, merger/acquisition, or management buyout/in
Not only can we manage your finances and help you to understand each step taken, our expertise and contacts will open doors that may otherwise have remained closed.
If you’re hoping to maximise your finances, look no further.