The best source of finance for small businesses

Need some cash to launch your new venture? Learn about which source of finance for small businesses is best for you in this article.

We’ll cover the main ways small businesses get off the ground and discuss the advantages of each, including:

• Organic growth: using your own profits
• Help from those around you
• Loans and grants
• Equity fundraising

Launching a new business doesn’t have to be expensive, but that doesn’t mean it’s free. At Countingup, we want to help new business owners become successful. For more information on how to grow your business before learning the pros and cons of the methods below, read our dedicated article How to finance a business.

If you’re already in business or you have some personal money set aside, you can use this as a way to establish your business. While you might be keener on saving this money for a rainy day, there are key advantages of using money that’s directly available to you to expand. 

This could avoid having debt tied to your business and the ongoing obligation to meet minimum payments each month. This could be especially important if you hit a dryer sales period and struggle to cover the full amount.

With organic growth you’ll be able to scale your business in relation to its market performance and interest from customers buying from you.

Depending on your ambitions, your profits might fall short of what you would like to do and getting there might take far longer than you would like. Here you can consider other avenues.

Many new entrepreneurs get started with the help of friends and family. For some, it can be mum or dad helping to package orders on the weekend; for others, it’s helping to cover some start-up costs.

Having this sort of financial support can be good for your business because you’ll have an established relationship with those who support you. This can be particularly useful for business owners if their personal finances make it difficult to qualify for low-interest bank loans or if grant applications fail.

However, if you’d like to take this route to build your business (or your friends and family insist on helping you) make sure to establish whether any money they give you is a gift or a loan. This can be done with something as simple as a signed piece of paper or a written message that clarifies whether your generous patron expects to see the money back at all. If they do, establish when, how much and so on.

It can be difficult to talk about the nitty-gritty of finances with close relations. However, avoiding the potential for legal trouble down the road is worth the small amount of effort it takes to secure some form of agreement in the first place.

A new and incredibly successful source of financing available to small businesses is crowdfunding. Using online platforms like Indiegogo, Kickstarter and SeedInvest, up-and-coming entrepreneurs can share their business ideas to generate awareness and income. The idea rests on interested customers giving money to gain special deals that recognise the help they’re providing with their funding. 

These platforms have helped millions of small businesses, collectively raising billions of pounds, and can help entrepreneurs avoid debt on their accounts. The success of a fundraising campaign is often tied to slick and clever marketing, so there’s no guarantee of success. However, it can be a viable option to run alongside other efforts to help cover every eventuality.

Securing business loans and grants is the most established and traditional pathway for businesses to get started.

High street banks around the UK offer introductory business loans to many new businesses looking to get established. Similarly, the UK Government also offers personal loans at 6% interest for new entrepreneurs, which also come with mentoring support. 

These financing options are tried and tested methods of launching a new business and will likely feature in some form as your business grows to even larger sizes. While many UK banks are open to new entrepreneurs (and may offer higher interest rates to match the perceived risk), there is a chance that you may be declined. In this case, government support schemes are often more suitable options.

Before we discuss secured versus unsecured financing, it’s worth noting these UK government loans are treated as personal debt – not business. Therefore, if your business is unsuccessful, the loan is still tied to you personally. 

Generally speaking, banks prefer providing secured loans to help finance businesses. This is because they are provided with an asset as collateral. Here collateral means something that can be given up and sold if the loan repayments aren’t met. In turn, banks typically offer better interest rates in recognition of this lower risk.

However, not all business financing can be secured – either because the loan amount is being used to buy many assets, or because businesses simply need cash available to cover costs. Therefore, unsecured loans (even though they often come with higher interest rates) can provide you with the flexibility to manage your finances as needed.

This is an option only available to limited companies as they have equity (shares) to sell in the first place.

This can be a particularly attractive option for new directors as it helps them avoid debt on their accounts. Similarly, some shareholders, like angel investors, like to provide support and business connections for companies to help them grow – thereby increasing the value of the company overall.

However, this financing route still comes with pitfalls as it means there are additional opinions to take into account for the future direction of your company. Therefore, if you would prefer to maintain near 100% control over your business, you might want to consider using a mix of equity and debt financing.

Make sure you understand your finances when you’re looking to secure funding.

Countingup is the business current account with free, built-in accounting software. With all your financial information in one place, Countingup can automate your tedious bookkeeping admin. 

Countingup comes with real-time profit and loss data, so you can quickly and easily understand your business’ performance at a glance.

The app also provides automatic expense categorisation and a receipt capture tool so you can make sure your accounts are always accurate. And with the automated invoicing feature, you can save time and get paid faster.  

Keeping on top of your finances on a daily basis will help you prepare for any funding applications or approaches to investors you make. Find out more here and sign up for free today.