Business funding options - what choices do you have?
10 August 2018 3939 Views
When you are starting up a new business, it is unlikely that you will already have enough capital to invest. Taking out a business loan is the best option as this will give you the chance to get set up.
But which loan type is best for your business idea?
Also known as asset-backed lending, a secured loan is the most common type of business loan. Lenders tend to think of this as a less risky loan because it is ‘secured’ against your assets such as land, property or equipment. This means that should you default on your loan, they will still be able to recover the money.
For you, a secured loan often means that you are able to borrow more money and many secured loans can go over and above £1 million. Another perk is that you can usually take a much longer period of time to repay the loan meaning that you will have more manageable monthly bills. This is especially advantageous for start-ups who may have cash flow issues to begin with.
The disadvantages are that secured loans take much longer to obtain as there are legal requirements and property valuations involved. The other problem is that there may be upfront costs, administration fees and broker fees.
An unsecured loan does not require you to back the money with your assets but this does mean that the loan will be much smaller. However, unsecured loans may have more flexible repayment schemes and, usually, the longer the repayment period, the lower the interest rate - but do be aware that interest rates on unsecured loans are often much higher than on secured loans.
The best use for an unsecured loan is to cover short term cash flow issues when you are just starting out or for quiet periods during the year. If you are already trading, an unsecured loan lender will assess your business trading position and may ask for a personal guarantee against the loan.
The disadvantage of this type of loan is that you may already need to be established as a business in order to get the loan in the first place, meaning that start-ups could easily end up in a catch-22. The other problem is that this type of loan won’t come even close to the amount that a secured loan could get you so for may not be suitable for a large business venture.
There are a lot of different business grants available in the UK, especially for tech start-ups. Grants are great for getting funding, but they might also be able to offer support throughout your development process. Applying for a grant can be quite laborious but if you have an innovative new idea then you would be well-advised to see what is out there for you.
The best thing about a grant is that it is essentially free money that will allow you to develop your business and gain prestige in your chosen industry too. It is also perfect for businesses that have found a niche where there may be less competition for the money.
The only problem with a business grant is that it is unlikely to cover all you start-up expenses so you will also need to apply for other types of funding. Plus, with a lot of competition in some industries, there is no guarantee that your proposal will win. Another potential issue is that the money may have strings attached meaning that you may find yourself cornered in your own business doing something that isn’t quite what you had envisaged.
Peer to Peer Lending
As banks are increasingly wary about giving out business loans, peer to peer lending has become a more popular method for matching people who wish to invest their money and those who need to borrow. Though this method can be quite expensive and may be risky, it is quite easy to raise substantial funds this way.
To get your loan, you should first look at a range of sites to see which might be best suited to your needs. Most sites work by matching borrowers to suitable lenders. This means that there will be a range of options to choose from on each site with varying rates and upper limits.
The advantages of peer to peer lending are that you don’t need to get the banks involved which means that you could find highly preferential rates. However, peer to peer lending is very risky for the lender so you will need to make a good case for your business.
There are two types of crowdfunding: equity-based and reward-based. Equity-based crowdfunding is where people contribute money to receive equity in your business; reward-based crowdfunding is where people contribute money for a reward.
Dave Beard from Feasible.co.uk says “There are lots of crowdfunding sites you can try, Kickstarter is a common one but there are others that are designed specifically for start-up businesses and others still that are for more niche projects. The best thing to do is to have a look at a few different platforms to see which the better match for your business is”
The major advantage of crowdfunding is that you can validate your idea because if people are willing to invest their money in you, it must at least have potential. You are also free to choose what you give in return for the funding so you don’t have to give away all your equity. Any business can go for either crowdfunding option and there are a lot of possibilities.
The disadvantage is that crowdfunding takes a lot of time and effort on your part. You really need to commit to your campaign in order to succeed. There is also a risk that if you don’t reach your target, it could be damaging to your reputation and prospects.
Whichever route you choose to fund your business, make sure that you have run your numbers several times to be certain about how much you need and how long you will need to repay the money.