There are so many funding options for business growth. The major hindrance to starting up a small business is funding.
One common option is to take out a loan from a bank or other financial institution. Another option is to bring on investors in exchange for equity in the company.
Additionally, businesses can often receive government grants or loans to help with expansion.
Finally, many companies choose to finance growth through retained earnings, which are profits that are reinvested back into the business. Ultimately, there is no one right way to fund business growth.
Most entrepreneurs don’t realize that there are more ways to get funding. Get the right guidance and advice from invoice funding broker.
Internal or external funding is a vital part of business growth, but what type of funding do you need when? While each small business might have a different path towards expansion, financing will still be required each step of the way.
The best option depends on the specific needs of the company and the availability of capital. Here we outline the typical stages of business growth and the key types of funding for each.
Start-up Business Funding
The first steps of a business are often referred to as the `start-up’ phase. If your business is in this stage, it means you have legally established yourself as a company, and your products or services are ready to go to your first customers.
During this early stage, you are likely to be making a number of investments from building up stock, to buying or renting a premises for your business. Small business loans, business overdrafts and invoice financing can lend start-ups a helping hand when it comes to boosting cashflow, as it’s likely you face the challenge of not burning through your cash reserves.
To help maintain an upward trajectory in profit, finding the best funding options for your start-up is crucial.
Potential funding options include insider finance, which is funding provided by `insiders’ like family, friends or business associates; angel finance or financing from an affluent individual who then gains convertible loan notes or ownership equity; and loans specifically for small businesses. Other options include:
- Trade credit
- Bank loans
- Business overdraft
- Equity crowdfunding
- Invoice Funding
Growth / Profit
If, as a start-up, you have demonstrated that your business will be successful by generating consistent income and gaining new customers, then you have entered the next step in your journey – growth.
This stage will see your profits improving slowly but surely as revenue begins to cover ongoing expenses. Balancing production capacity to meet demand is crucial, which means you may need the right funding to keep driving this growth.
Venture capital, which comes from well-off investors, along with a Flexible Business Loan that allows you to choose a fixed or variable rate loan with repayment terms to suit you are two financing options you can choose from. Other potential funding options include:
- Trade credit
- Bank loans
- Business Growth Fund
- Commercial mortgage
Established Business Funding
After a sharp growth trajectory in the previous stage, your business may enter a stage of manageable sales growth, building a group of loyal customers and securing a solid place in the market. Many of your new customers might be through referrals from your current clients. At this point, your business has entered the established stage, which means you have made the next move forward in your growth journey.
It’s all too easy to sit back and relax while in the established stage. Rather than becoming comfortable, you should instead look forward to the future and focus on improvement, productivity and driving innovation.
Focusing on the future opens up funding options to you like hire purchase, which is a method of purchasing goods by making instalment payments over time. Other funding options for this stage include:
- Venture capital
- Trade credit
- Bank loans
- Asset finance
- Invoice Discounting
Expansion Funding
Businesses who have reached the expansion stage are typically growing into new markets and distribution channels. Market share is growing, which allows you to look to expand your workforce and appeal to customers with new products.
While expanding your business’s ventures is an exciting move forward in your growth journey, you will still need to perform similar planning and research as you did in the start-up stage. What do you know about your new markets? How have your customers’ needs changed?
Similar to the growth stage, the financial options in expansion include venture capital, trade credit, and bank loans. You can also utilise funding like export invoice finance, which makes it easy to free up cash from unpaid invoices issued in other currencies. Another option may be asset finance, which allows you to borrow money or get a loan by using the company’s balance sheet assets including short-term investments, inventory and accounts receivable. Other funding options include:
- Medium-term notes
- Mezzanine-fund financing
- Private placements
Business Funding Options for Mature Companies
When your business becomes mature, it might face challenges like dropping sales and profits, along with the after-effects of the expansion phase – negative cash flow and growth plateaux.
At this stage, it’s likely you will face many decisions that could be difficult. Should you sell and exit your business? Should you continue expanding? Depending on the decisions you make, your funding options will change.
When you reach this stage, the funding options available will suit your size. A commercial paper, which is a short-term, unsecured debt instrument issued by a corporation, may now be available to you, as is an Initial Public Offering (IPO), which is the first time your private company’s stock is offered to the public. Other potential funding options for business growth include:
- Trade credit
- Intermediate-term financial institution loans
- Medium-term notes
- Mezzanine-fund financing
- Private placements
- Public debt
- Cashflow finance
- Invoice factoring
- Leveraged & acquisition finance
Small Business Funding Option
Small business funding options are available for start ups and businesses that have been established for six months or more, via the following types of business funding.
Overdrafts
An obvious choice is to apply to your bank to set up an overdraft or to increase the limit of one that you already have. The money you need will be instantly available and there will be no restrictions on how you use it.
However there are some disadvantages to going down this route, as interest rates on overdrafts can be high and they are really only meant to be short-term solutions. Also you are only able to apply for an overdraft from the bank that holds your business account, so there’s no opportunity to shop around for a better deal – plus the bank is free to cancel an overdraft and ask for the money back at any time.
Business Loans
Business loans come in two different options, secured or unsecured business loans, these are a very popular way of raising finance for small businesses, for a number of reasons. Firstly repayments stay the same over the term of the loan, so it’s quite straightforward to budget for their repayment. It also means that if you’re using the loan to pay for equipment you can tie the loan in with its lifespan. However problems can arise if you find yourself in the situation of wanting to pay the loan off early as there may be a financial penalty for doing this.
Peer to peer lending
The rise and rise of social media has helped to popularise a whole new method of business finance over the past few years. In peer-to-peer lending individuals who want to see a better return on their investments than putting them in a bank would achieve lend their money to businesses instead. For the borrower this has the advantage of usually having no minimum amount they can raise and the interest rate is also usually lower than a bank’s or building societies’. There will be a fee to pay to the peer to peer lending company you use but this may well be offset by the savings you’ll make on your repayments.
MarketInvoice is a member of the Peer-to-Peer Finance Association and is backed by leading European venture capital fund Northzone (invested in Klarna, iZettle and Trustpilot) and private equity group MCI Capital (also invested in iZettle, Azimo and Gett).
Crowd funding
Crowdfunding is an alternative business funding method that is similar to peer to peer lending in that it involves borrowing money from a non-traditional source. The way it works is simple; working with one of the many crowdfunding websites you give an explanation of what you need the money for and other individuals or businesses can choose whether or not to invest in your business. The main danger of using this method is that by explaining exactly why you need the capital injection, your competitors can see your plans and may try to copy your ideas
Merchant Cash Advance
Merchant cash advances, Business Cash Advance, Merchant Loan Advance are a few names this innovative product in alternative business funding options is called. It is available to the UK business market via a number of cash advance lenders. The concept has only existed for a few years, but it’s already proving very popular with retail businesses and the leisure sector. A merchant cash advance uses your card terminal to ‘secure’ lending. This funding option is perfect for businesses without many assets, but who have a good volume of card transactions every month. Repayments are then taken as a proportion of your revenue, making it a quick and easy funding solution for many SMEs.
Invoice Factoring
One area of business funding options that is often overlooked is invoice finance and invoice discounting. This is unfortunate as it’s one of the most practical and effective ways of raising money without having to pay interest. The costs for these type of factoring facilities are on par with an overdraft. There is no need for business plans or income projections as this is an advance against invoices that have been raised. That’s because all you are effectively doing is getting paid by the invoice factoring funder soon as you invoice them.
By getting paid immediately this means that your cash flow remains healthy and you have the capital you need to run and develop your business. You also have the funding options of continuing to issue invoices and chase up payment yourself or of handing it all over to the funder. This allows the freeing of a sales ledger clark from chasing outstanding invoices. By doing this it allows you to concentrate on making your business a success.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.