Top of mind in any start-up or growth business is: “Do I have enough money to grow this business?” And if the answer is ‘no’ then you will probably be asking yourself “Where am I going to get investment money from?” and “What does it involve?”. Here we look at financing options for business growth.

Not knowing or understanding the financing options for business growth and where to find the investment are blockers for many SMEs. Add to these challenges is the need to know the processes involved with each option. 

Here we will help address the challenges, give you an overview of the types of financing and investments available and hopefully arm you with the confidence you need to grow your business.

Do you understand your SME financing options for businsess growth?

There are many different ways to raise money and entrepreneurs should invest time in understanding the options. Often they imagine there is only one way – an overdraft. Worse still, is the idea that you need to get a mortgage on your family home. In most cases, this is not necessary. Another misconception is that you have to give away equity to get investment, but many effective options do not require this.

But there is a wide array of finance options for business growth which can satisfy these particular needs of an SME. Learning about these options and the people who specialise in them will increase your knowledge and confidence about discerning the right financing options for you. Also, you must have the right professional support to help you in both analysing your business and making smart choices. 

Does your business actually require financing? Making basic changes.

The first stage is to consider if you need financing at all. Are there ways you can restructure your business? Examples may be changing payment terms, collecting debts or changing supplier terms. As well as improving cash flow generally, this stage is important because investors will expect you to have worked on these options before approaching them.

What are the financing options for SME? 

So, you have ticked the box for stage one and decided you do need financing to help you grow your business.

The two main routes to raise money are in the form of debt or equity. Within each of these broad options, there are many variations. 

1. Financing your SME through debt

The attraction of debt is that you don’t have to give up part of the ownership of your business – but the obvious downside is that you must be able to repay the debt in full. You must plan your future cash flow and repayments. The main types of debt finance are invoice financing, revenue-based financing, startup loans, government-backed lending or crowdfunding. 

  • Invoice financing. A lender will advance a portion of monies owed on unpaid invoices. When the invoices are paid, you receive the balance of monies less fees payable to the lender. This helps free up cash flow locked in unpaid invoices. 
  • Revenue-based financing. This is similar to a normal loan, but instead of paying back fixed amounts on a regular basis, the repayments may fluctuate in line with your actual revenues. This approach helps you match your cash flows with your repayment obligations.
  • Start-up loans. As the name implies, these are specifically for early-stage companies. Other than this, they are not dissimilar to traditional bank lending and you will likely be asked to provide some form of personal collateral.
  • Crowdfunding. Crowdfunding is normally arranged via an online platform such as Funding Circle. These platforms have grown in diversity and creativity over recent years and are a very efficient way of combining marketing, awareness, new customer acquisition and offering investment opportunities to a wide range of investors. Instead of just offering cash repayment in exchange for investment, companies can reward investors with other types of rewards such as free products or discounts.
  • Government-backed lending and not-for-profits Here the lenders are part of or supported by central or local government. There are a range of options and qualification criteria related to regionality, sector or the support of specific government initiatives. Some examples of lenders are the British Business Bank, British Enterprise Fund, Northern Powerhouse, local enterprise partnerships or local councils.     

2. Financing your SME through Equity

With equity, you will be giving away some level of ownership of your business, but, unlike debt, you are not committed to repayment of the equity. Instead, your investors are rewarded through a growth in the value or profitability of your company.

There are three main categories of Equity investment – angel investing, venture capital funding and private equity.  

  • Angel investing. In return for a share in your business, angel investors – who are generally people looking to make a personal opportunity to help businesses grow – tend to invest in businesses with an expectation of a 20-25% return on their capital. Angels will often want some form of involvement or control in the business and will bring their business experience to the table. This can assist growth in a company up to the point it is ready for Venture Capital.
  • Venture Capital Funding. Like angel investors, venture capital investors will want a stake in your business and will want to exercise a level of control over the business. They are professional organisations that specialise in growing businesses quickly and getting a high return on their investment. 
  • Private Equity. Here we are talking about professionally managed pooled money funds. In many ways, they are not so different from Venture Capital funds, but one clear distinction is that private equity funds will tend to invest in relatively mature companies and adopt a variety of strategies to create value. 

Increase your knowledge of financing options for SMEs

Experts in financing options for business growth all agree that you should surround yourself with experts and be constantly curious to be able to make the right decisions for your business. Top tips:

1. Learn from others. 

Even without going to financial experts, if you have people in your network who already have successfully grown a business, ask them what they did. Get to learn from as many people as you can just how and why they chose the investment options they did.

2. Network

Always be growing your network. In the right communities, you will meet both the entrepreneurs and the investors. Again, networking events are a place to learn about finance from others, but you will also find lenders, financiers and brokers there too. 

3. Talk to brokers

Brokers sit between the financing community, who have the money, and the entrepreneur community, who need the money!

As well as being specialists in financing options for business growth, their real value is selecting the best and most appropriate options for you. Brokers do not provide finance themselves but introduce third parties whom they believe are a good ‘fit’ for you, your business and your financing needs.

They will be paid a commission for their work, but this should be money well spent as they will save you time and money. Brokers can do something which most entrepreneurs will never fully get to grips with knowing all the options and the whole market for SME investment and they reduce the strain of making decisions between outwardly similar options. 

Other useful information for SME owners seeking investment

  • Do I need to be profitable to attract investors? 

No! Some of the world’s largest companies are still not profitable! People will invest in ideas and potential for growth and they do not need to see immediate returns. 

  • Don’t give up too soon!

Whether you go with a broker is your choice, but whatever route you take, you need to be aware that it could be a tough, long road ahead. Few businesses get investment at the first time of asking. Be prepared for rejection and how you will manage that and the ‘mental game’ for getting to your goal. You will be dealing with investors who are sifting through thousands of applications like yours each year and only investing in a handful of companies. 

Rejection is the norm, but there are positive ways to deal with that and learn from the experience. Rejections are not personal, it is just about ‘fit’. Never make a presentation in the search for investment without asking the obvious question “Are you interested in investing?” If it’s a “No” do not be afraid to ask if they know of a contact who may be interested in the opportunity.

  • The pitch

Investors will expect you to look like you can be trusted with their money! Real life is not so different from Dragon’s Den. You will be questioned in some detail about their key concerns which are: do you have the cash flow and how will you manage it, how will you spend the investment money, and how will you pay it back? You need to understand these in advance and be ready to answer. 

They will expect a good pitch document which will have no more than 10-12 slides. Include profiles of the key people in the business, what the business does, projections or growth statistics for the business and an explanation of why the investor is a good fit for the opportunity. Be prepared to be questioned on all aspects of your business, your plans, your market etc. A great pitch will be one which has anticipated all of the investor’s needs.

  • Get the basics right

While great ideas are potentially the source of great businesses, growth will not be possible if you do not have the right level of organisation and understanding of how businesses operate. Make it easy to show that you have got the ‘basics’ right. Have a clean, well-administered corporation, a defined system of governance and a system for operations. For example up-to-date shareholder agreements, comprehensive terms and conditions and a strong ESG strategy. As well as showing you are on top of this, it shows potential for scaling the business easily.

  • Consider taxation

The UK offers very attractive tax breaks for early-stage companies. Learn the options and the rules. Beware – if you get investors before you consider the right structuring for these tax breaks, they may not be available. 

  • Are all investors good? 

No! The saying goes that the ones who ask the most questions write the smallest cheques. It is still very hard for you to discern the quality of an investor, and this is why brokers or specialist advisors are so useful in terms of steering you in the right direction.

Thank you to Andrew Wingfield for this article. Andrew is a lawyer and member of the Farringford Legal corporate and commercial team