Accessing funding as a small business owner

There are a diverse range of funding options to navigate for SMEs, from traditional bank loans to angel investors and crowdfunding

There are many reasons why you might need business funding. You could be looking to develop a new product, invest in equipment, launch in a new market, or strengthen your cashflow.

With many funding solutions available, it’s important that you understand your options, plan appropriately, and ensure your business is ready to secure the finance you need. 

Business funding options for UK small business owners

Here are some common funding options:

Bank loans

Traditional funding from banks and other financial institutions that you pay back with interest.

Lines of credit

Money you borrow up to a predetermined limit when you need it.  

Equity investment

Funding provided in return for equity ownership of a business.

Equity investors include angels, wealthy individuals looking to back businesses, and venture capital firms, which invest in companies with significant growth potential.

Crowdfunding

Funding raised from a large number of people using online platforms. Types include reward-based (providing a product or something else in return for finance), and equity-based (providing equity in return for funding).

Invoice finance

Funding that involves using unpaid invoices as collateral in return for quick access to a percentage of the value of the invoices.

Asset finance

Allows you to borrow money to acquire a business asset, such as machinery, equipment, and vehicles.

Grants

Finance linked to specific business activities or sectors that you don’t have to pay back. Grants are provided by government agencies, local councils, non-profit organisations, and large businesses.

Know why you need funding

Finance providers will want to see a clear business case for why you need the funding, so it’s vital that you understand exactly why you want the money.

Your business needs to be ready for the funding you’re trying to access or you could end up wasting your time.

This is particularly true of equity investment. According to Minerva Business Angels head Luke Pulford, businesses approaching investors too early in their journey is one of the most common mistakes.

‘There needs to be a certain amount of validation, defensibility, traction, or revenue in a business in order to make it an attractive investment proposition,’ he said.

‘Angels rarely invest in ideas. The more progress you can make with your business, the more attractive it will be as that de-risks it compared to other opportunities investors are looking at.’

Make your business funding ready

Financial management

‘Any business raising funding needs financial forecasts and realistic and defendable assumptions’, says Kevin R Smith, director of BOOM & Partners. ‘If these are not available or are unrealistic, then it is an instant red flag.’

The financial records you need include:

• Profit and loss (P&L) statement, which shows your revenue, expenses, and profitability over a specific period.
• Cashflow forecasts for the money flowing in and out of your business during specific periods.
• Balance sheet indicating your business’ financial position (assets, liability and equity) at a given point in time.

Governance and operations

Investors will conduct due diligence so you need to be compliant with all relevant regulations.

You should also have strong leadership and HR policies, with protections in place for your intellectual property (if appropriate).

Business model, traction and scalability

To successfully attract investment, you need a business model that clearly defines your value proposition, target customers, the size of the market opportunity and your path to profitability.

You also need to show that your product or service has proven traction and capability to scale, with sales and positive customer feedback.

Prepare your pitch

Refining your pitch is vital for getting investment. ‘You should always prepare a business plan as this is the only way to truly understand all the moving parts of a business,’ said Kevin R Smith. ‘When trying to raise debt or equity funding, it becomes essential.’

Your pitch needs to demonstrate your business’ success so far and its potential, with a clear reason for why you need the funding.

When pitching to equity investors, Kevin R Smith advises that a one or two page ‘teaser’ document is good for initial conversations, while a 12-18 page pitch deck is what you’ll need for the more formal pitch.

‘Look at it from your audience’s point of view’, advises Luke Pulford. ‘They need to be able to understand your proposition, why it is a good investment and how they are going to get a return.

‘Anything you have done to de-risk the business should be included as well as your progress and investment to date. Include anything you have that can be leveraged against investment, such as grants, which will show how you are helping to maximise cashflow.

‘If you are looking for angels to bring anything else into the business, make sure you include that too. Many angels want to use their skills, experience, and connections, as that increases their returns.’

Practice your pitch so you deliver it with confidence and in a compelling way. Be prepared for lots of questions by being on top of all the details about your business including the financials. Research the investors you are pitching to make your pitch as bespoke as possible.

Know where to look for funding

Sources of funding include:

• Equity investors: meet them at networking events. Ask for introductions from other business owners. Make connections on LinkedIn. Connect with business angel networks.

• Grants: local council websites, government grants directory and websites for England, Wales, Scotland, and Northern Ireland

• R&D and innovation funding: Innovate UK
  
  
• Government funding schemes: British Business Bank

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