Sources of Funding: 9 Types With Examples

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Sourcing finance is usually fundamental to starting an enterprise and keeping it running. According to Xero’s research, approximately 50,000 SMEs fail due to cash flow problems each year in the UK alone. Judging by these statistics, businesses certainly find it difficult to maintain a regular cash flow and to source funding.

Sourcing finance is just as crucial during the inception of the business. When starting up, enterprises need enough funding to help them break into the market.

Below are helpful ways for both start-ups and established businesses to source financing for their enterprises. 

1. Business loans

These are loans, given by a bank or credit union, to small businesses. A benefit of this type of funding is that it allows you to retain complete control of your company: there is no need to give away shares.

Many major banks and credit unions offer this type of loan. However, like many of the items on this list, you will need to convince your creditor that your business is a good investment before receiving any capital.

Draft an in-depth business plan so that you have a full understanding of where your business is headed and what your own financial risks are. You’ll want to present the bank with a shorter, more concise version of the longer plan. 

A one-page business plan, with a fleshed out financials section, is often used for the job. Your creditors will need to know why you are asking for x amount of money as well as what your financial projections for the next five years are.

Another effective business loan is the start-up loan scheme. This is a UK government backed loan scheme designed to help start-up businesses get going. The UK government launched the scheme in 2012 with £151 million in initial funding. 

The government wanted to help 30,000 businesses by 2016. With a good success rate, this loan is worth considering if you are thinking about starting a business. For more information about the start-up loan scheme, read What is a start-up loan scheme?

2. Merchant Cash Advance

A Merchant Cash Advance is an agreed upon sum of money that is given to businesses in exchange for a percentage of future credit or debit card sales. 

This type of financing is very effective for small businesses such as seaside restaurants which get their money seasonally. In the ideal test case, the business will have a stable flow of cash year round due to being funded by merchant cash advances in the winter.

Benefits:

  • No interest; it is an agreed upon sum of money
  • Helps businesses with unevenly distributed cash flow secure stable working capital year round.

3. Invoice Financing

Invoice financing is where a financier will loan money for any unpaid invoices. This is often done at a base rate of interest on the same day as the request.

When businesses rely on client invoices as a source of capital, the clients often don’t pay on time. This can be detrimental to small businesses who rely on a steady cash flow. Invoice financing can be a quick way to get cash almost instantly while going into very little debt.

4. Selling Shares

A limited company can sell shares of its company for capital. This is relatively common and results in investors getting a stake in the company, aside from the founder. 

This is a good way to generate significant cash which can be used to pay down debts or even invest back into the company. In the UK, you will need to complete a share transfer form. This will allow you to use your share capital as a non-public company.

Another way to sell shares is by approaching a venture capital firm. These will finance your business in exchange for equity in your company. However, these firms often focus on stable, fast growing companies like Revolut, which was funded by a venture capital firm called TCV.

However, in order to sell shares, you must be a limited company, not a sole trader or any other kind of unincorporated business. MachFast is an app that allows you to set up a limited company in under 10 minutes. This will give you the ability to generate capital through selling shares.

5. Grants

A grant is a sum of money, predominantly given for free, to an enterprise. In the UK, there are hundreds of grants given by various foundations, trusts and even the government.

Here is a list of 226 grants for small businesses in the UK. These help a business get of its feet, funding its start-up costs for example. However, the application process can be arduous – afterall you are being given free money. 

As a result, you should make sure you target the right grants to apply to. Remember to present them with a detailed presentation of your financials, with a concise overview of the rest of the business: for example, using a one- page plan format.

6. Angel Investors

Similar to a grant, you are not expected to directly pay back the money given to you by an investor. Angel investors are often high net worth individuals who will invest their own money into your business. They also usually target riskier business ideas than VC companies.

According to the UK Business Angels Association, in general, angel investors will invest £5000 to £500 000 in a single venture. Roughly £1.5bn is being invested by Angels each year. This is a good way to secure funding if you worry about falling into debt.

7. Crowdfunding

Crowdfunding is when you, a small business or person, ask the general public for donations. Crowdfunding does not require repayment and relies on the generosity of the public and their belief in what your business has to offer.

Websites such as Kickstarter are a popular source for crowdfunding. According to Forbes, inXile Entertainment managed to raise $8.6 million over three campaigns on Kickstarter. If you have a good product which the average person can understand and get behind, then crowdfunding can be an effective source of capital.

8. Selling Assets

Many businesses sell assets as a source of quick funding. These are assets which are often rarely used or have become obsolete now your business has grown. However, a clever way to sell assets, without using up something your businesses use, is through streamlining your workspace. 

For example, if you have an office block which is spacious, then you can often section off one side for your business and rent the other out. There is no need to try and fill every space in your office just because you’ve bought it. This can generate income over time too. Similarly, if your business buys a warehouse, often they are not used to their maximum capacity. You’ll be able to lend part of your warehouse for funding.

9. Personal Assets

Often small businesses rely on their own personal assets to get started. Whether this is selling a second home or using personal savings, using your personal assets is a quick way to get funding without any fear of repaying the money. 

It is crucial to not go overboard with this source of funding. You should maintain enough money for yourself to continue your daily life. Especially as the business could fail or, as is the case this year, you are hit with a global pandemic. The unpredictability of life makes it almost essential for you to have some failsafe.

Closing thoughts

If you are thinking of starting a business, a good way of getting money is by saving it. For example, rather than hiring one of the many secretarial services in the UK to help start your business, you could use the MachFast app. This free solution to the incorporation of your company is fast and can save you up to £400.

Another great way to save money in your business, is by understanding the environment you’ll be working in. Our blogs aim to help and instruct small business owners to give them the best chance at starting and running their enterprises. Check out How to start your business on a limited budget for similar help.

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