In times gone by, there were limited options for small business owners looking to source funding. With the advent of the internet, the choices have expanded exponentially, with numerous options for sourcing capital outside of traditional lenders and high street banks.
These options are still available, but they are supplemented by new funding sources, providing businesses with more choice and the ability to shop around for the best funding source to suit their particular needs.
Most forms of funding for small businesses fall into the categories of either debt or equity, although there are other sources that do not fit with these two main categories. Visit the Ahmed Dahab Twitter page for more information about small businesses.
Before sourcing financing, some business owners may wish to consider bootstrapping, which is explained in the embedded short video.
Small Business Loans
Beginning with traditional forms of funding, small business loans are still a good option for many small businesses looking to raise capital for start-up or growth. These are debt-based loans that must be repaid, so it is essential to find a loan with terms that are affordable for the business.
Small business loans can be accessed at high street banks and lenders, with varying rates of interest depending on the lender and the circumstances of the business. Companies that already have an established incoming revenue will find it more likely to achieve a small business loan on favourable terms.
Loans also usually need to be secured, meaning the borrower has to put some form of asset up as security in case they default on the repayments. This might mean the business premises or equipment can be seized if repayments are missed.
There are a variety of grant opportunities that small businesses can apply for, from the government, private organisations or local authorities. Each grant will have its own specific eligibility criteria, but they are typically reserved for start-ups or for businesses that are able to demonstrate benefits to the wider community, such as supporting economic growth, helping people from disadvantaged backgrounds or developing new technologies.
One of the best things about grant funding is it does not need to be repaid, so in essence it is free money. However, the application process can be time-consuming and there may not be a grant that your business is a good match for.
One new major source of financing that has come about due to the internet is crowdfunding. This form of financing allows for many smaller investors to contribute to a pool of money, working together to help the entrepreneur achieve their objective. There are now many different websites dedicated to facilitating crowdfunding for businesses, connecting potential investors to entrepreneurs and helping small business owners raise capital from multiple sources.
Some of the most popular websites for crowdfunding are shown in the infographic attachment.
Venture capital tends to focus on more established businesses that have a proven track record of generating profit and are looking to expand. Venture capitalists typically invest in a business in exchange for an equity stake in the company.
Venture capital can therefore be an expensive way of raising funds, as the investor owns that percentage of the business for as long as they remain on board. However, what venture capitalists often bring to the table as well as money is in-depth industry experience and knowledge of the best ways to help grow the business. As a resource, this can be invaluable to certain businesses.
The PDF attachment looks at another option: angel investors.