Navigating the Shark infested Waters of Small Business Funding

On November 12, 2010, wrote:

Finding the right funding at the critical time can be a crucial factor in a firm’s success, and many developing businesses go through several different rounds of investment as the business develops. On some occasions an initial owner’s capital investment of perhaps just a few dollars to give birth to an idea will eventually lead to a listing on a stock exchange. Along the way, however, the business may need to source several different types of funding, with each type requiring its own unique approach.

Finding any source of funding will be reliant on the owner having an accurate understanding of the finances, and being able to project these to potential investors. Thanks to a plethora of modern affordable apps and solutions on the Internet – such as new accounting software for small business that makes bookkeeping easy – what was once a huge stumbling block is no longer such a concern.

Many businesses struggle due to receiving inappropriate or inadequate funding, or the right funding at the wrong time (often too late), or poor advice – so where do you go for funding, and how do you identify the right types of funding under your particular circumstances? (You don’t want to have to face those ruthless dragons!)

  • Owner’s capital: the seed money for start-up and early expansion
  • Friends and associates: start-up, early stage/pre-trading, and expansion
  • The clearing banks: overdrafts and short/medium-term loans, mostly to finance short-term acquisitions such as business equipment and support irregular trading patterns and cash flow shortfalls
  • Factoring/invoice discounting: alternative cash flow management tools
  • HP and leasing: often most useful for capital expenditure
  • Merchant banks: medium/long-term loans, often for larger sums
  • Government: often highly restrictive and can be difficult to obtain
  • Corporate venturing: benefit needed for both corporate supporter and smaller business, but can effect critical positive change for a small business

Many business owners will be familiar with many of the conventional forms of funding and will be comfortable with approaching the recognized sources for support when it’s needed. Often, the following less conventional sources can often set the pulse racing.

Business angels: usually (but not always) for start-up or early stage finance for the relatively small (but nonetheless vital)

Private equity: development finance provided for a share of the equity and usually requiring significant growth within three to five years. This is often serious money transferred, with angel funding and venture capital generally seen as:

  • Requiring a high rate of return
  • Requiring a large amount of equity to be given away or
  • Requiring deals that are not below several million dollars

These less conventional forms of funding often come with additional benefits, like access to better resources and advice that may otherwise not be available.

In our experience, however, although growth is vital to enable everyone concerned to benefit from a good return on effort and capital employed, funds are accessible if you have a credible plan, a presentable team, a skip-load of enthusiasm, and an accurate handle on your figures. And these are generally regardless of wider financial conditions. So before you begin, ensure you have gone through the figures with a fine tooth comb and carried out whatever bookkeeping tests may be required to demonstrate the financial soundness of the company or idea.

About the author: Steve Jennings, a UK-based self-confessed Internet geek and multiple small business owner, is the co-founder of WeMakeBookkeepingEasy.com, a site aimed at giving free bookkeeping advice and support.


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