The 10 Key Sources of Small Business Finance

Many owners of failed businesses will tell you that finding the right funding at the right time can be a critical factor in business survival, and ultimately success. It’s a process that is fraught with problems, is never easy, and has only gotten worse since the global credit crunch, but is the wrong type of finance worse than no finance at all?Many developing businesses go through several different stages of funding as the business grows, and may who’ve been through the process are firm believers in the old adage “you need to kiss a few frogs to find your prince”.We know from the statistics that many small businesses fail with the first few years of trading, but we also know that sometimes the initial owner’s investment, of perhaps just a few pounds to kick start an idea will eventually lead to a stock exchange listing.From personal experience I know that a large proportion of businesses can suffer through having the ‘wrong’ type of finance at the wrong time, or poor advice, so here’s a quick guide to help you through the maze and to see what type of funds might be right for your aspirations. (At least you won’t face humiliation with an audience of millions!)Owner’s funds: Easily accessible, used at start-up and during early expansion.Friends and associates: Beware of mixing family/friends and business, consider all possible outcomes and what impact that may have on your personal life. Ideal for start-up, early stage/pre-trading and expansion.Clearing banks: Overdraft and short/medium term loans, mostly to finance short term acquisitions such as office equipment and support irregular trading patterns and cash flow shortfalls. All the news may be about the banks not lending to business, but if you don’t ask you don’t get!Factoring/invoice discounting: Alternative cash flow management tools, consider the potential impact on your relationship with your clients, there are potential positives and negatives associated with having a third party involved in the accounts receivable process.Leasing/HP: Further support for short term capital acquisitions, a good potential source of leverage but consider all the taxation implications of each form of leasing/HP finance.Merchant banks: Medium/long term loans – usually for larger sums, and often more a case of who you know…Grants and other government support: Usually restricted geographically, by time or for specific industries or purposes, another potential case of who you know not what you know, and likely to exponentially diminish with government cut-backs.Corporate venturing: Backers will be looking for a return and this may impact upon your commercial decisions, again this can have both positive and negative implications but go into it with your eyes open, you may end up feeling like your working for someone else again!Most business owners will be all too familiar with many of the common forms of funding and will be comfortable with approaching the recognised sources for support when it’s needed. It’s the next two that set the pulse racing, sometimes seen as the holy grail of SME funding – visible to all, but impossible to reach.Business Angels: Usually (but not exclusively) for start-up or early stage funding in relatively small amounts, but relatively small amounts of the right type of finance can have a huge impact on the fortunes of a small business, never underestimate the potential positive influence that an experienced angel could have (apart from the purely financial impact).Private equity/venture capital: Development funding provided for a share of the equity and usually requiring significant growth within 3-5 years, can produce serious amounts of money, but can again be a case of who you know – so get networking in the right circles!Depending on whose view you believe, angel funding and venture capital are generally seen as: Requiring a ridiculous rate of return
Demanding a majority shareholding or
Not interested in deals below £5mBy the nature of the investment, more successful investors will often be looking for larger opportunities as they experience a law of diminishing returns, Warren Buffet for example is constantly on the lookout for potential opportunities to invest in family run businesses but it’s not worth his while unless they’re $1 billion+ opportunities.In my experience, however, although growth is a prerequisite to enable everyone concerned to benefit from a good return on effort and capital employed, generally funds are available if you have a credible plan, a presentable team and a skip load of enthusiasm.It’s also true that angels and private equity firms see hundreds of business plans and are only able to invest in a few, but funding is usually available for dynamic businesses with genuinely well prepared plans. Consequently, approaching those who are actually interested in your product, service or sector and presenting your proposal in an acceptable manner does help your chances of success – as does having the right advisers. Do not underestimate the power of investing in some good “direct response” style copywriting to give your presentation the best chance of standing out. Those poor people dragged through the Dragon’s Den on television would all have fared far better with a little help and preparation from experienced corporate consultants, and a little bit of that magic salesmanship.