What Are the Funding Options for Small Businesses?
Cash is king when you are setting up and running a business.
For many small enterprises an injection of cash is required at some point – either at the start-up stage, in preparation for growth, or simply to stay in the game.
However, many small business owners set out with blind optimism and underestimate the level of funds required to keep a business afloat. Oliver Spevack, Chartered Accountant and co-founder of OS Accounting specialises in supporting start-ups and SMES.
He says: “Poor financial planning can cripple a small business and lack of funds is one of the common reasons why new businesses run into problems and fail.
“So many small businesses that come to us have no business plan and no idea how to raise capital. They are completely unaware of the grants and tax relief schemes available to them.”
Funding can make or break a small business. Let’s take a look at the options available.
Family and friends
The cheapest way to borrow money is by getting an interest-free loan from family or friends. You may be able to negotiate a longer-term payment plan than you would get with a traditional loan through a bank, or agree to pay the money back in a lump sum once your company reaches a certain profit or turnover target. You probably won’t have to give a share of your business away either.
Social media crowdfunding
Crowdfunding has become an increasingly popular option for funding a small business in recent years. It does, however, require a strong promotional strategy, increased transparency, and the possibility of giving up a stake in your business. See more on the different types of crowdfunding and the best crowdfunding sites to launch on here.
A wide range of lenders offer loans to small businesses, from traditional banks to online specialists. Small business loans are also available from the government. The British Business Bank (the government’s publicly owned development bank) was set up to help small businesses in the UK access funding. The bank offers start-up loans from between £500 to £25,000 and helps small enterprises understand and access funding options.
See some frequently asked questions on small business loans here.
Not a suitable option for businesses that want to retain 100 per cent control over their business, but angel investors do offer funding opportunities and can often bring some expertise to small businesses.
Essentially, an angel investor is a person, or group of people, who provide funding in exchange for a part of the business. They can be silent (i.e. just provide a capital injection) or can be active and offer advice and expertise to help grow the business.
BBC2’s Dragons’ Den has become the template for what happens when a small business needs investment from an angel investor.
Read more on the pros and cons of angel investors here.
Venture capital is similar in its concept to an angel investment – there are, however, differences. Essentially both offer funding in exchange for a share of the business. The main difference is that angel investors work on their own, whereas venture capitalists are a division of an organisation or an organisation in their own right.
Venture capitalists are only interested in businesses that are likely to make a high return. They look for small businesses that have the potential to grow into large companies.
Research and development grants
Small business grants are one of the best sources of funding available to start-ups, developing and established small businesses. There are many private and government schemes available. The qualifying criteria varies hugely, but there are literally hundreds of schemes from Princes Trust Grants to global investor, Unltd Social Enterprise Funding.
Many of the grant schemes available to small businesses are industry or location-related, such as the Energy Entrepreneurs Fund which supports the advancement of energy technology or council-run business development grants, which may also have industry-related criteria.
Tax relief schemes
Not strictly funding, but tax relief schemes are another underused resource that can provide a considerable boost to a small business’s funding pot. The tax breaks commonly overlooked by small businesses include:
- Research and development (R&D) tax credits
- The Annual Investment Allowance (AIA)
- The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)
- Enhanced Capital Allowance (ECA)
- The Employment Allowance
Let’s take a brief look at each of these.
R&D Tax Credits – a government scheme designed to reward and encourage greater innovation across the UK business sector, which can amount to tens, even hundreds of thousands of pounds, every year. See more about the government scheme here.
Annual Investment Allowance – a government scheme offering tax relief to British businesses on qualifying capital expenditure, specifically on the purchase of business equipment.
EIS and SEIS – these are government backed investment schemes that encourage investment in small and medium-sized companies.
Enhanced Capital Allowance – the government ECA scheme was introduced in 2001 to encourage businesses to invest in energy-saving equipment. Businesses can claim 100% first year tax relief on qualifying equipment.
Employment Allowance – The government’s EA scheme was introduced in April 2014 to incentivise recruitment in smaller businesses – this is worth up to £3,000 per year to set against an employer’s Class 1 NIC bill. Single director companies without employees do not qualify.