Last year marked another landmark period for UK entrepreneurialism with more SMEs opening their doors for business. According to data from Companies House, 608,110 businesses were started in the UK in 2015, a new record and up from 526,447 in 2013.
This is further proof, if any were needed, that SMEs provide the backbone of the UK economy. But for each of these new businesses, the next big challenge on their exciting journey is deciding how and when to grow. Funding is the key issue: where is the money going to come from and how will it be spent?
That is why we established The Business Funding Show. It is the first and only exhibition focused exclusively on business funding and growth support. It takes place on the 2nd and 3rd of February this year in Old Billingsgate, London. The show will bring together two key groups of people - entrepreneurs and business owners that are looking for funding and leading finance and service providers. This new event will feature expert advice from titans of UK business such as Richard Reed, serial entrepreneur and founder of Innocent Drinks, as well as other leading figures such as David Buttress (Just Eat) and Lord Bilimoria (Cobra Beer).
The funding market has changed beyond all recognition in recent times and the days of a visit to the local bank manager are long gone. New players are entering the market with flexible and exciting channels of borrowing and lending. Advances in Fintech, innovative methods of working and access to information are just some of the drivers behind this growth; but all of the players in the this space are coming to the market for the same ends - to provide SMEs with the best type of funding to grow their business.
Whether you want to expand overseas, consolidate in your market or build your team, the Business Funding Show is opening its doors to provide you with the help you need to take the next step to grow you business.
But we know everybody can’t make it to London. So, for those that can’t, we’ve outlined the ten most common forms of funding below as a starter guide for those looking to take the next step on their business journey:
Business angels are wealthy entrepreneurs that are actively seeking to invest in enterprises based on dynamic business ideas. They’ll want something in return, which is normally a share of the business. However, you’ll not only benefit from their investment, you’ll also get to reap the rewards of their experience.
If you need serious investment (£500k plus) then venture capital financing is the answer. This option is best suited for those who are primed for rapid growth and need a cash injection to get moving. However, don’t expect to get a huge lump sum upfront. Generally speaking, VC funding comes in instalments to help manage growth effectively. You can also expect to give away a substantial portion of the business - but in return, you’ll get significant help to scale-up.
Crowdfunding is a recent phenomenon which involves asking many people to invest specific amounts of money in your business, usually in return for something. Do it well, and you’ll swiftly raise the money you need without spending too much in the process. However, it’s not as easy as it looks, and in today’s competitive market, you’ll need to make sure your business idea stands out.
Peer-to-peer lending. Most peer-to-peer lenders are private individuals investing in a range of different business ideas. Opportunities are listed on specialist websites and some operate on an auction basis, which means, after completing an initial assessment, you can select a lender based on a rate of interest and loan period. However, you’ll need a good financial history, and if you’re a new company, you might be considered "higher risk", which will mean higher interest rates.
Asset financing offers a way to secure a loan against your capital assets and get money quickly for your business. The downside is clear however - fail to pay it back in the specified timeframe and your assets are seized by way of payment. However, if you’re confident that you can fulfil the terms of the loan, it’s a relatively simple way to get funding.
With invoice finance you can raise cash against future invoice payments from your customers. This comes in handy if you need to cough up cash for suppliers before being paid by clients. However, this type of financing isn’t often available to those who sell direct to the general public. Likewise, if your clients don’t pay - you’ll have to shoulder the costs, plus interest.
A cash advance is the business equivalent of payday lending. This is a high-risk option and only suitable if you need the money fast and you know you can pay it back quickly. Otherwise, be warned, interest rates are eye-wateringly high.
If the banks have turned you down, but you have a sizeable pension fund, pension-led funding is a good way of getting your hands on a commercial loan. It’s a simple concept - you secure your loan against your pension. However, the loan can’t exceed 50% of your total pension fund.
Fancy getting some money without having to pay it back? Business grants are offered by governmental bodies and industry organisations. Every business wants to get their hands on these coveted grants, so competition is fierce and you’ll have to work hard to ensure your pitch stands out.
Accelerators and incubators are there to give you the benefit of their expertise, support and mentorship - and they’ll also be able to point you in the right direction for financial support within their network of investors. You’ll probably need to pay a fee or give them some equity to secure their help, but it may be advantageous in the long-run.
Copyright © 2016 Arina Osiannaya, director of the Business Funding Show.
I have just read an article claiming that 10% of companies that America’s top ten venture capital firms or VCs [ie private equity firms] invest in actually succeed. This correlates exactly with the yardstick that VCs and seed corn capitalists I know use. 10%!
One chance in ten. We know that only 10% of small businesses actually make it to year five, so it could be reasonable to suggest that anything greater than 1:10 (10%) odds would be better than you get from starting a business. Just 10%.
So, is it worth it for a 10% gamble? Well, to put all this in perspective, here are the chances of winning at the casino:
Slot machines 32%
Horse racing 41%
Here are some conclusions (if you are in any way rational).
Do not gamble at small business unless… Unless what?
I’ve always felt that there were two types of startup – those with too much money and those with too little. I’ll leave the topic of too much money for another day, and instead think about the more common problem of having too little money.
When you’ve got too little money, the key is not to spend a penny you don’t need to, and to make sure that every penny you do spend is effective. That’s pretty much common sense, but I think that it’s worth drilling into much more deeply.
One of the pitfalls when starting a business is mixing up the keys to business success with the stuff that has to be done as you become successful. In start up mode, all your effort needs to go into the former and virtually nothing into the latter.
A business bank account, business cards, business premises and the services of an accountant can all be vital ingredients – but not if your business isn’t yet making any sales.
Your efforts and resources should go into working out your business proposition, finding customers and delivering that proposition to them. Make sure that you keep 100% accurate records, and probably set up a limited liability company to protect you from personal bankruptcy, but otherwise focus on starting to make sales and money.
When I set up SellerDeck (formerly Actinic), providing ecommerce services for SMEs, we had two vital objectives. We were trying to sell critical technology to small companies and ISPs, and we also needed to raise funds. I renamed my house “Actinic House” which was perfectly legal and cost nothing. I also joined the Institute of Directors and met all prospective investors in the IoD offices in Pall Mall.
These are the sorts of techniques that I would describe as “guerilla” – getting to your objectives by low cost and unconventional means. You can find all sorts of ideas both online and from other successful entrepreneurs. You won’t get them from the bank manager or the accountant, these techniques tend to be anathema to them. But it’s these that will help you to succeed, not having leather bound accounts.
Starting up a business is always going to be tough and like many things in life, there’s probably never going to be a perfect time to take the leap and launch your idea. For many entrepreneurs, one of the key concerns is acquiring funding to turn your dream into a reality. Doug Richard says that one of the best ways to fund your start up is to seek investment from one of the three Fs – Friends, Family and Fools.
Many people are reluctant to enter into business with friends. What has your experience been? Would you advocate mixing business and friendship?
It's not easy raising finance for any business right now, least of all a start up. Which is why it's worth taking a few moments to find out how Simon Woodroffe managed to finance Yo Sushi, when the banks were turning him down.
Has anyone else out there been creative with early stage funding for their business? Please share your story.