Funding is an important consideration whether you own a small business at the seed, start-up or growth phases of the business cycle.
In an odd way, funding is also one of those things that put people off from venturing and making an idea they have a reality.
Funding should be viewed as a means and not an end, and the variety of options we’ll explore below mean that there is something for everyone.
There are even Free options as I have previously written about in 5 Ways To Start A Business For Free At Zero Risk.
My experience of successful startups as both a CFO for high growth small and medium businesses and entrepreneur in my own capacity is that those who do this well are:
- Able to accurately match their need for cash to the business stage of growth and needs;
- and understand that there is a real trade-off or cost of raising money, as such the return on that money needs to exceed the cost.
The minute entrepreneurs or management teams start to raise money to get comfortable, which isn’t uncommon, it usually signals the beginning of the end of such ventures.
Raising money is a task of its own, however, the stewardship of that money raised and how it is used to achieve the intended goals is yet another challenge.
If you’re a solopreneur wearing all kinds of hats in your venture, I’d recommend very careful consideration of your needs for external funding and whether your goals could be achieved by other creative means.
Funding options available for online (and offline) business growth could be categorised as either equity or debt.
Debt is cheaper than equity because:
- The interest you pay is finite, and once paid off, that’s it. Also, if your business is doing very well, you pay only your interest due and not a share of profit, which could be very large. This can work against you too if your business is struggling.
- Interest expense incurred on debt is usually tax deductible, whereas dividends paid to shareholders comes out of retained earnings and isn’t tax deductible.
- If a business goes bust, the debt holder has first claim on the company’s assets. Therefore they have some sort of security/collateral. Whereas, equity holders don’t as such require a higher compensation by way of returns.
The other really important point about debt is that you retain full ownership of your business but you instead have the obligation to pay the debt back.
However, as you’ll see below, there are many options to consider, and I’d recommend giving equity away in your business as a last resort as that introduces other complexities.
Below is a myriad of options for funding your online (or offline) business as you consider a startup and need seed funding or as you plan growth:
1. Family and Friends
This is usually the first resort if you’ve exhausted your own savings or simply want to use Other People’s Money (OPM).
Friends and family can actually provide debt or equity, and in the former, you might be lucky enough to get an interest free loan or cheaper debt.
The difficulty with dealing with friends and family is the challenge of bringing business into your relationships. If things go sour, this option could cost you more than money.
I have personally had mixed feelings about approaching friends and family. For my direct family, it has so far been a success, but with friends, it has been abit more tricky.
To have success raising money from friends, treating them as a business associate and offering a return could be helpful.
2. Self Funding
This is usually the first option for most entrepreneurs. Self funding could be through your own savings or through a credit card.
Another way to self fund is through remortgaging your home and getting cheap debt out of it. If all works well, the upside is that you keep the entire equity in your business.
The downside to self-funding is that you might blow your entire savings and risk everything, including your marriage and relationships in the process.
However, nothing ventured, nothing gained.
This is essentially where the business funds itself by using profits and related cashflow that it generates to fund its operations and growth.
This is my favourite way of growing a business because much of the success here relies on your creativity and the effectiveness of your business machine and processes.
You’d need to understand what it costs you to acquire a customer and the life time value of that customer, coupled with a highly effective sales funnel.
The businesses that get this right rarely require funding from the likes of Venture Capital (covered below).
This method also has no disadvantages that I can identify, beyond the hardwork needed to automate processes and systems, and gathering of data on your business.
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4. Crowd Funding
You raise money through a platform, usually on the internet, with many thousands of funders taking tiny stakes in your business or project.
The funding you receive could be in the form of equity or debt or rewards based.
The innovation foundation, Nesta, wrote a great piece on how to find the right crowdfunding platform for your cause.
The disadvantage with crowdfunding is the administrative burden linked to dealing with multiple equity ownership.
5. Internet or Cloud Funding
The internet has opened up funding opportunities that allow you to pitch your idea to investors across the world.
When this works out well, there are usually multiple investors who pool funds to back an idea.
This source of funding does have its restrictions on how such fund providers can operate.
6. Angel Investor
The angel investor is a wealthy and sophisticated individual, looking to invest in multiple start-ups. These are the sort of individuals you see on Dragon’s Den.
They usually would have made money in some capacity in their business lives, and bring money as well as experience and connections.
However, these individuals also want significant equity stakes in businesses they back as it has to be worthwhile to them to invest their money.
Angels will have a team of lawyers, accountants and the like who they’d use for each deal. Essentially, they come very savvily, and so you’d need to know what you’re doing.
7. Venture Capital
Venture Capital (VC) is usually suitable for high growth business, usually those in technology, fintech, creative industries etc.
Due to the high risk and high reward potential, the valuations of such businesses is the subject of much debate.
Businesses seeking VC funding are valued usually based on a multiple of income or EBIDTA (if they are profit generating).
VC funders also want a significant stake, usually one of significant influence (>20% holding).
The VC investors usually aren’t investing their own money. They’re usually funded by institutional investors such as pension funds or even the government.
As such, they have a huge amount of pressure to deliver a return on the money they might be investing in your venture and will have a strict timetable for when to exit your business too. Usually within a 5-year timescale.
Only businesses with significant high growth potential should go anywhere near venture capital funding.
Finding a suitable business partner is another good source of funding. You could have a partner who either becomes an employee or acts as an adviser to the business.
For example, someone who runs a blogging business might strategically partner with a graphics designer because they would bring the skills necessary to create and generate revenue through courses.
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9. Peer To Peer Lending
This is similar to the equity crowd-funding covered above, except that there is no equity swapping hands, only debt.
This is an innovative new way of raising money that bypasses the banks and provides funding to small and medium businesses and projects alike.
RateSetter, Zopa, and Funding Circle are examples of such providers of debt funding via peer to peer lending.
Apart from bypassing banks and getting quick approvals, you can also get tailored loan terms that suit your needs.
Getting funding from a peer to peer investor requires rigorous checks, although these are usually with a quick turnaround.
10. Small Business Lenders
There is no shortage of alternative lenders to small businesses. Simply google “Small business loans” and you will have thousands of results.
Many of these people have idle capital that they want working for them. The only issue for you as a business owner is that you’ll likely pay astronomical rates of interest and with high redemption premiums.
However, such funding is available as a last resort or for high return generating projects.
E.g. You may need a bridging loan for a property deal, which would yield returns that more than compensate for the cost of the money borrowed.
11. Bank Loans
Banks are the traditional lenders, and although they still continue to do alot of business, they’re coming under pressure from challengers with new models.
Such challengers have faster approval processes and often offer more favourable terms.
Bank loans still represent an attractive option if you want to grow your business or start a project, especially if you have a good relationship with your bank manager.
Such loans are usually secured against an asset such as property.
We have found this funding useful for major projects such as purchasing a commercial building etc. However, for an online business, you’d need to demonstrate your source of future cash flows.
12. Unsecured Loans
These are loans that don’t require any security on an existing asset such as your home.
Such loans are easy to obtain provided you have good credit.
A good starting point is to get your free Experian Credit Score. This way you know what your creditworthiness is and improve your chances of success.
Given we’re in a low-interest rate environment, these loans remain extremely attractive. Just make sure you repay every penny without a default!
If you have a good relationship with your bank, you can easily negotiate a decent overdraft fairly cheaply.
This is a good option to consider if you need a few thousand pounds to start or grow your business and can repay it in the short term.
The disadvantage with this is that it might indicate your lack of liquidity and might flag up as negative on your credit report.
14. Alumni Money
If you attended a decent university, you’d be surprised how many of them have wealthy alumni that have made pledges to sponsor start ups with potential.
Usually, what you have to do to become eligible is write an essay or present a one-pager business case.
Given the often low interest in these funds, because most people don’t know they exist, you could be right at the front of the queue.
I recall quite clearly during my MBA, my college struggled to give away a few grand due to the low turnout in applications.
15. Pledge Future Income
This involves giving away a certain percentage of your future income or profits, in order to receive a fixed sum of money now.
The upside is that you’re likely to get someone interested if your business appears to have some potential.
However, the obvious downside is that you cannot predict how successful your venture might be, therefore giving away future income might be more costly.
Grants are usually available from the government or organisations interested in fostering entrepreneurship.
A good example is the Small Business Grants Initiative, which runs a monthly competition to give away £5,000 to support business growth.
In conclusion, there is a myriad of options for starting or growing your online (or offline) business. Be careful to choose what is necessary for your business, offering you the right balance of flexibility and cost.
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What source of funding did you use to start or grow your business? Please comment below and share your experience.
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.