Raising growth finance for growing a small business can be a real challenge, but since the emergence of alternative finance there is more diversity in the market than ever. Here are a few of the commonly used options available.
Equity vs debt
The first decision you’ll have to make when looking at options for growth finance is whether you want to take out some form of loan (‘debt finance’) or sell shares in your company (‘equity investment’). This is a key decision that will immediately rule out some sources of funding. There’s no right or wrong answer here, but some rules of thumb to consider.
If your business is particularly young or unproven, it will be difficult to entice VCs or angel investors because they’ll want to see more tangible potential. On the other hand, if you’re already on a healthy growth trajectory you might want to keep equity and control yourself.
Generally speaking, a small business will potentially raise more money by taking the equity route; but investors will want to see some of your own money already invested — so you have some skin in the game.
Ultimately, choosing between borrowing money or selling equity comes down to your gut feeling about whether or not you want to give up a percentage of your business — and some entrepreneurs will decide to borrow money because there are no strings attached once the money is repaid.
Friends and family
There’s not a huge amount to say about the ‘friends and family’ method of raising growth finance — if your family or friends have capital to spare and want to help, it’s a simple way to fund growth, whether they lend you the money or buy a share of your company. However, since many businesses won’t be able to raise money this way (or perhaps won’t want to), let’s move on to some of the more generally applicable forms of raising growth finance.
The most common form of business lending is a business loan — but they come in many shapes and sizes. They could be secured against something valuable owned by the business; unsecured, and therefore based on your recent accounts; or lent as a percentage of revenues or card terminal sales.
Unsecured loans are a popular option for businesses looking to scale, because they equip you with a lump sum that you can use for one big project or many business purposes at the same time. To get an unsecured loan, you’ll have to clearly demonstrate your potential for growth, and the lender will want to look into your recent performance. However, it can be difficult to get an unsecured loan as a small business, and many will have to look elsewhere.
If you have valuable assets, they might represent your best route to raising finance, and there’s a few ways you could do it. Using the asset as security is the most straightforward — you borrow money based on the value of the asset, which can be sold by the lender if you fail to make repayments.
You could also consider sale and leaseback, which sells your asset to the lender to give you a lump sum, while you continue using it on a lease agreement. There is also sale and hire purchase back, which ends up being fairly similar to an asset refinance but with different balance sheet and tax implications.
Finally, invoice finance can be a very useful product for small businesses looking to grow. You effectively borrow money based on outstanding sales invoices, so you can even out your cashflow and know you’ll be ready for the next job. As with an asset refinance, the amount you can borrow depends on the value of the security (in this case, an invoice) — so while it’s not necessarily the right choice for a big step up, invoice finance can help you grow steadily.
As you can see, there are lots of ways you can raise growth finance. It all comes down to your business profile, and lenders will look at how long you’ve been trading, whether or not you have assets, and how you make money from customers. All these things will determine the best way to raise growth finance — and even if your business is small, it can be done.
Conrad Ford is chief executive of Funding Options.
Further reading on raising finance