How to attract funding for your business in 2021

How to attract funding for your business in 2021

Starting a new business is an exciting time for any entrepreneur, but it also brings its own unique challenges, which you may not have initially consi

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Starting a new business is an exciting time for any entrepreneur, but it also brings its own unique challenges, which you may not have initially considered before launching. Funding is one of the biggest concerns you can face when growing your business, especially where and how to attract it. Even if you think you’ve crunched the numbers multiple times and planned to grow affordably, the hidden costs of starting a business, such as licensing fees, legal fees, and even administrative costs like office space and utilities, can quickly add up against you.

When you’re strapped for cash, getting the right funds can be make or break for your business. Here, we’ll go through the most common types of funding, and the best way to apply for them.

How much funding do you need?

Before we start discussing the different types of funding available to small businesses, it’s important that you know what investors are looking for. The first — and perhaps most crucial part — is knowing how much money you actually need. You don’t want to scare potential investors away with too large a figure, but you should equally try and avoid asking for too little, burning through the money quickly, and having to ask for more. In general, the average amount needed to launch a business starts at £5,000, but startups will go on to spend almost £23,000 in their first year in order to survive. It’s also been reported that only 43.4% of SMEs make it past five years, so you will need to take the future into account when considering your funding options.

Creating a long-term budgeting and cash-flow plan will allow you to figure out how much you’ll realistically spend and earn in the first few years of launching your business, taking fixed and variable costs into consideration. This gives you, and your investors, a good idea of how much money is realistically needed in order to launch a profitable business. Just bear in mind that it’s not uncommon for costs to be higher than turnover during the first few years, so it could be a few years before you begin to break even, and even longer before you start to see the benefits in actual profit.

Crowdfunding

Crowdfunding has grown in popularity as a legitimate financial option for businesses, and it’s only expected to become more popular, with experts anticipating a growth at a CAGR of over 16% from 2020-2025. This will allow companies the chance to gain funding while also marketing their business, and guaranteeing initial sales for the first round of production. However, in order to encourage prospective buyers to spend money on your product — which probably doesn’t even exist yet — you need to have an excellent marketing strategy. At this early stage, you should show your audience how your product works in action, highlighting its benefits in comparison to any competitors. Perhaps the best way and fastest way to reach as many people as possible is with video marketing, providing a demonstration of a prototype of your product. Video marketing is becoming increasingly popular, and experts claim that it can help with lead generation and increased traffic to websites. In fact, 80% of video marketers have admitted that it has directly increased sales.

However, if you don’t even have the funds to create a prototype of your product, you may well be left wondering how to drum up interest in your business. In this case, you may have to rely on specialist advertising, such as animation. It’s not uncommon for even the biggest brands to turn to 3D animation in these circumstances, keeping you from the errors of real-life filming. As London-based animation studio Frantic points out: “[CG animation] offers a vast range of flexibility for brands to showcase drinks, beauty products, or natural environments in a way that traditional live-action filming cannot achieve.” This means you can place your product anywhere in the world, without having to physically go there, while showing the intricacies of how your product works without needing to take apart any prototypes to show an audience. Having a well-produced advertisement can then sit alongside your crowdfunding campaign in order to draw your audience in, encouraging them to buy your product.

In some cases you may even want to sell stakes of your business in exchange for considerable donations from investors. This is known as equity crowdfunding, and can include selling stocks and revenue shares, as well as any other stakes you may hold. This method is more likely to attract serious business investors, so is always worth looking into, especially in the early stages of your business.

Venture capitalists

Venture capital is a type of private investment that is dedicated to helping startup companies which show promise and potential. If a wider venture capital firm chooses your business as a potential investment, a board will have to vote on whether or not they consider you viable, and if you’re successful, the money will be taken from a pool of the firm’s funds. These kinds of investments are generally seen as high risk/high return opportunities, and usually take place in the early stages of a business venture.

Venture capitalist investments are unique to each business, so some businesses may be granted investment based on just the idea, provided it’s strong enough. However, most of these deals are closed with the following as minimum:

  • A founding team
  • A minimum viable product (MVP)
  • Customers

This means that you’ll need to be able to prove that your product is industry-disruptive, and has the potential to grow quickly in order to give a high return on investment. You’ll likely need to pitch directly to the venture capitalists, so you’ll need to give them a comprehensive explanation of your management team, the product and industry, company history, investment amount, and company financials.

You should also look into who you’re pitching to, and pick the right VC team that will work for your business. Each firm is rather specific about the industries in which they choose to invest, ensuring they have expert knowledge of any gaps in the market, as well as your potential competition. Pick the firm that fits your business well, and you’ll increase your chances of gaining the funds you need.

Business loans

There are two types of business loans you can get in order to fund your venture: secured and unsecured.

Secured business loans

These types of loans are secured against assets owned by your business, which can include your commercial property, vehicles, specialist equipment, or anything else of worth. This protects you by ensuring that you are not personally liable for repaying the borrowed funds, and if you’re ever in a position where you cannot repay the loan, the lender has the right to sell the aforementioned assets in order to get their investment back.

Many businesses use this method as it’s a way to ‘unlock’ cash that’s tied up in your business, as the lender will give you money according to the value of your assets. Any repayments will be set out over a term agreed by you and the lender, as well as interest calculated against your outstanding balance.

Unsecured business loans

An unsecured business loan is based on your business’s ability to repay any loans, but may be harder to gain if you’re a smaller company that isn’t established. However, lenders may ask a personal guarantor, usually the company director, to make repayments if your company defaults. Applying for an unsecured business loan will generally involve a check into your credit history, income, savings, and employment history, in order to gauge whether you’ll be able to make the necessary repayments.

This type of loan comes with the advantage that you don’t need to put anything up as collateral, which is ideal if your business doesn’t need or own any physical assets. However, if your business itself hits rough times, you’ll have to continue paying off the loan, often at a much higher interest rate, due to the increased risk.

Startup loans

Launching a business in the UK means you’re eligible for a government-backed loan to help with the expenses. The startup loans scheme launched in 2012, with the government pledging £151 million to equip entrepreneurs with the tools, resources, and financing to get their fledgling businesses off the ground. You can be eligible for loans between £500 and £25,000, and if you have business partners, they too can apply for a startup loan in order to maximise your chances at getting funded. Just be aware that each business is limited to a total £100,000 of financing.

While you’re free to spend the money however you need — buying things like equipment, stock, premises, and marketing — there are some things your loan cannot be used for, including debt repayments, education programmes and training qualifications, or for investment opportunities. If you accept a startup loan, you also agree to repay it within five years, so it’s important that you think carefully about how much you’ll borrow, and devise a repayment plan that will work best for you.

Business credit cards

Also known as a corporate credit card, business credit cards work in very much the same way as a personal credit card, allowing you to purchase items to pay off in monthly installments. You can either clear the balance every month, or simply make the minimum payments if you’re budgeting carefully. Many entrepreneurs choose to use business credit cards in order to manage cash flow over a short period of time, such as paying for staff expenses or other things that require petty cash, but it can be used for larger purchases if necessary.

Just like with a personal credit card, it’s important to keep on top of your spending in order to afford your monthly payments. A corporate credit card also lets your company establish and build a credit history, which can be useful later down the road if you need to apply for a business loan. It’s important to note that your personal and business credit scores are unrelated, so even if you have a poor personal credit score, your business may still be eligible for a corporate credit card. Compare your options with various banks and credit card operators so you can find the best business credit card for your company.

Getting the right type of funding can make or break your business. Regardless of how you manage to secure the money you need, it’s important to budget and plan carefully in order to maximise your chances of success in the long run.