Topic overview

Funding business growth

Funding business growthLack of funding is a key reason why many businesses fail to scale. If you can't access the right funding mix as and when you need it - you're unlikely to grow significantly.

After you've decided on a business growth strategy, you'll need to update your business plan. Your plan should detail your future financial needs. Seek input from trusted financial advisers to identify the cash flow implications of taking on additional debt.

Trying to achieve significant business growth brings its own cash flow challenges and you must be mindful of the risk of overtrading.

Sources of investment

Once you know how much you need and when, you can explore your funding options. Some sources expect the business owner(s) to have invested, or be prepared to invest, their own money while reinvesting business profit.

Much depends on how much you need, but friends and family may be willing to invest in your business. They should only invest money they can afford to lose and everyone concerned should carefully consider the implications if things don't work out as planned. You should set out the terms of any loan or investment clearly with a signed agreement.

External investors will expect to see a sound business plan that reassures them that the business can be scaled up (the financials must be beyond question). Crucially, investors will want to know when they'll be able to exit, having made a tidy return on their investment.

Bank finance

Many ambitious small businesses seeking to grow will first speak to their bank about funding. Overdrafts and invoice finance are fine for short-term needs, but loans are better suited to bigger, longer-term objectives.

Business loans are generally taken out for a fixed period of between one and ten years, with repayments agreed in advance. If your bank turns down your loan application, you may be able to appeal. You may be able to find another lender via the Responsible Finance website.

You could be asked to provide security when taking out a business loan, and the assets you put up as security may be given a lower value than you expected. Alternatively, the Enterprise Finance Guarantee scheme may provide a solution. It can be used to guarantee 75% of loans of between £1,000 and £1.2 million. The British Business Bank runs the scheme on behalf of the Government.

Business angels and private equity

Business angels are usually highly successful entrepreneurs who invest in businesses with high-growth potential in return for a share in your business. Their experience, knowledge and contacts can prove invaluable to your business. Visit the UK Business Angels Association website to learn more.

Private equity could be more suitable if you need a significant sum (£2 million plus) and a management buy-out or buy-in is your growth strategy. According to the British Private Equity & Venture Capital Association (BVCA): "Private equity firms typically invest majority stakes in underperforming companies [with] potential for high growth. Growth is delivered by working with the company's management team to improve performance and strategic direction, making complimentary investments and driving operational improvements."

Venture capital firms invest: "In the seed (concept), start-up (within three years of the company's establishment) and early stages of development." The BVCA has produced a concise guide to private equity.

Other funding sources

Alternative funding options include crowdfunding ("raising money from a large number of people all putting in relatively small amounts"). Peer-to-peer lending could be another possibility, via platforms such as Zopa, Funding Circle and RateSetter. Visit the Peer-to-Peer Finance Association website for more information. The Alternative Business Funding website provides a signpost to other non-bank sources of business finance.

Visit GOV.UK to find out about government-backed support and funding available in your area or sector. You may also identify local and national funding support available to your business via your local Growth Hub (ie local public/private sector partnerships in England often led by the Local Enterprise Partnership). Working with an approved independent UK broker could also help you to find the most favourable finance solution for your business. You may even be able to take advantage of R&D tax credits, so speak to your accountant.

The British Business Bank and ICAEW have published a business finance guide, which runs through the main equity and debt finance options for businesses that want to grow. Better Business Finance also "provides impartial information and support to businesses and entrepreneurs looking to grow". Set up in 2011 by Barclays, HSBC, RBS, Lloyds and Santander and managed by the British Bankers' Association, its website features an online finance tool to help small firms find funding solutions.