There are many ways you can raise finance when you’re starting a business, and it’s essential that you choose the right business finance for you.
You can borrow from family, use grant funding or even raise finance from outside investors, but most start-ups use a combination of all of these and then tailor them to their specific needs.
Here is a list of 10 ways to fund your business without a bank loan.
Use your own money – The best way to raise finance to start a business is of course to use your own savings; especially as very little seed money is required to set up your business. At one of my workshop presentation, I was approached by a lady who said that she really wanted to get started and the business model that best suited her was the one-to-one training. She went on to say that she had the money to get started but had the money in an ISA account and she didn’t want to take it out and lose the interest.
And I’m thinking to myself what interest? 1.75%?
I replied, what she should be doing is investing in a business and make that investment work for her.
Ask friends and family – Immediate family members may be a good option for business finance as they’re more likely to give you money and they will provide you with better terms than a bank.
But the downside to raising finance from family and friends is that it can place tensions on the relationship, worse still, they could lose their investment if your start-up doesn’t work out.
When you’re raising finance from friends and family, make sure that you have made a written loan agreement, as this should help avoid any misunderstandings between you.
Peer-to-peer lending. This is a process whereby a group of people comes together to lend money to each other. It’s been around many years, in examples like small business groups or ethnic groups supporting similar efforts. In the start-up context, look for a successful entrepreneur peer willing to fund similar new ideas.
Crowdfunding – Crowdfunding is, essentially, an extension of the charity sponsorship page in the business world. People come together, on crowdfunding sites, to pool money towards a particular venture or idea – it could be ten people putting in £500 each, or 3,000 people each giving £1.
Donors or investors on crowdfunding sites, such as Kickstarter or Crowdcube are typically private individuals providing small sums, so they’re unlikely to give you the sort of grilling, and rigorous conditions, an angel investor would. You can also scope out the popularity of your idea via a crowdfunding site, and get some crucial word-of-mouth marketing going
Micro-loans – If you only need a very small amount of money, you should think about a micro loan, which is tailored to your circumstances and can be used alongside funding from other sources.
A number of companies in the UK offer micro loans; where you can receive funds from £5,000 to £25,000, with generous repayment terms ranging from one to five years.
A Start Up Loan – If you are starting a new business or you have been trading for less than 24 months, you may be eligible for a government-backed Start Up Loan. These are unsecured personal loans of up to £25,000 that must be used for business purposes and a repayable at fixed 6% interest p.a.
Cash advances – Companies such as Worldpay, Business Cash Advance and Credit for Merchants allow businesses to receive money upfront before debts and invoices have actually been paid.
Under the terms of the agreement, the financier purchases a fixed percentage of your future credit/debit card transactions at a discount, and then advances the cash into your bank account, usually within 10 working days.
Repayments will be scheduled at a pre-agreed percentage of every transaction – usually between 10 and 20%.
With a cash advance, you can secure up to £100,000 without the burden of collateral or fixed monthly repayments, only paying the advance back when your customers pay you.
But you may have to meet a rigorous set of conditions; for example Business Cash Advance insists all clients must have been in business for at least a year, with a minimum monthly turnover of £3,500 and the ability to process credit and debit card transactions.
Asset finance – An asset-based loan works the same way as a mortgage. You borrow money against an existing possession, and, if you can’t meet your obligations, the asset is repossessed.
Assets which can be used as collateral include property and premises, accounts receivable, inventory and equipment.
Although interest rates are often punitive, asset-based finance can be extremely useful for a company desperate for cash, or a business backed by valuable property which has yet to make major profits – such as a hotel or plant hire specialist.
Angel investors – If you manage to impress a business angel, they may provide investment in return for an equity stake. Most angels are seasoned entrepreneurs themselves, so they know what you’re going through and they’re likely to be patient.
Furthermore, the process of finding and enticing an angel is far less daunting than you might think. If you can put together a tight pitch with realistic growth projections, and are prepared to give up a share of your business, this could be the route for you.
Community schemes. – A plethora of community development finance initiatives, or CDFIs, have been set up around the country to help individuals, and businesses, denied credit by banks and lending companies. CDFIs provide help with everything from bridging loans and working capital to funds for property and equipment purchase, but their terms are usually restrictive; you usually have to be either a micro-business or a social enterprise.
P.S. Recently I came across an excellent tips from Warren Buffet who knows a thing or two about making good use of your money, they are as follows:
On Money: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1,”
On earnings: “Never depend on single income. Make investment to create a second source.”
On Spending: “If you buy things you do not need, soon you will have to sell things you need.”
On Savings: “Do not save what is left after spending, but spend what is left after saving.”
On taking risks: “Never test the depth of river with both feet.”
On Investment: “Do not put all eggs in one basket.”
On expectation: “Honesty is a very expensive gift. Do not expect it from cheap people.”
Thought for the day
“Risk comes from not knowing what you are doing!”
– Warren Buffet