Small UK businesses have a variety of investment sources available, depending on their needs and stage of development. Here’s a look at some of the most common options.
Personal Savings Many entrepreneurs start by using their own savings or money from friends and family. While this approach avoids debt or giving up equity, it does come with the risk of losing personal funds if the business doesn’t succeed.
Bank Loans Traditional bank loans remain a popular choice, although they often come with strict requirements, such as a strong credit rating, collateral, and a solid business plan. Banks like Barclays, HSBC, and Lloyds provide loans specifically for small businesses. These loans are a clear way to access capital without giving up ownership.
Government Grants and Loans The UK government offers various grants and loans for small businesses, which can be particularly helpful for specific sectors or regions. Government-backed options, such as Innovate UK grants and loans through the British Business Bank, can help small businesses grow without the burden of traditional debt.
Angel Investors Angel investors are individuals who invest their own money in exchange for equity. Beyond funding, they often provide mentorship and valuable industry connections. UK networks like the UK Business Angels Association help connect small businesses with potential investors.
Venture Capital (VC) Venture capital funding is often sought by high-growth businesses, especially in technology and innovative industries. In return for funding, VCs usually take equity and often play an active role in decision-making. Notable UK VC firms include Octopus Ventures and Balderton Capital. While VC can provide significant funding, it’s more suitable for businesses with high growth potential.
Crowdfunding Crowdfunding has become a popular method for raising capital, particularly for consumer-focused businesses. There are two main types:
- Equity crowdfunding, through platforms like Crowdcube and Seedrs, allows businesses to offer shares to a large group of investors.
- Rewards-based crowdfunding, on platforms like Kickstarter, allows businesses to raise funds by offering non-financial rewards, such as early access to products.
Crowdfunding can also help validate a product or idea by attracting early interest from potential customers.
Peer-to-Peer (P2P) Lending P2P lending platforms like Funding Circle connect small businesses with investors willing to lend money, often with more flexible terms than traditional banks. This can be a quicker way to access funds, especially for businesses with a good credit rating and a clear repayment plan.
Business Credit Cards Business credit cards are frequently used for managing short-term expenses and cash flow. While they offer flexibility, they often come with high interest rates if balances aren’t paid off promptly. Cards from providers like American Express and Barclaycard are commonly used by small UK businesses.
Trade Credit Trade credit is an arrangement where suppliers allow businesses to pay for goods or services at a later date, usually within 30-90 days. This can help manage cash flow without taking on formal debt, though it requires strong supplier relationships to avoid penalties for late payments.
Invoice Financing This option allows businesses to borrow against the value of their unpaid invoices, providing a quick boost to cash flow. There are two main types: factoring (where the lender collects payments) and invoice discounting (where the business retains control). Providers like MarketFinance offer these services in the UK.
Asset-Based Financing Businesses that own valuable assets, such as equipment or property, can use asset-based financing to borrow against these assets. This type of financing is commonly used for purchasing new equipment or to free up capital. Lenders like Close Brothers provide asset-based financing to SMEs.
Friends and Family Some businesses rely on friends and family for early-stage investment. While this can provide essential funding, it’s important to formalise these agreements to avoid potential misunderstandings or complications later on.
Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) These government schemes offer tax incentives to private investors who invest in small businesses. The EIS is aimed at more established companies, while the SEIS is focused on early-stage startups. These schemes can make it easier for small businesses to attract investment by offering attractive tax reliefs to investors.
Bootstrapping Finally, many small businesses fund their growth through their own revenue, an approach known as bootstrapping. This allows the owner to maintain full control without taking on debt or giving up equity, though it may result in slower growth compared to businesses that access external funding.
Small businesses in the UK can choose from a wide variety of investment sources, ranging from personal savings and traditional bank loans to innovative methods like crowdfunding. The most suitable option will depend on the business’s specific needs, growth potential, and risk appetite.