Funding 101

There is a saying:

Turnover is vanity

Profit is sanity

Cash flow is reality

Every small business owner will be aware of how tricky that balancing act between paying all the bills and remaining solvent is. If you lose control of your cash flow technically you're overtrading, which is illegal – and you'll soon be on the downwards slide into insolvency.

However, if you have big ambitions and a sound business plan, you can resource funding to enable you to grow your business. That's not an alternative to keeping your finances flying in formation, but it is a means to grow quicker and benefit from economies of scale.

So, if your business is living on the edge of an overdraft because you're ploughing the profits into development, maybe it's time to look at other methods of funding.

Loans

There are various sources of lending. Small business people often find that family and friends are willing to 'invest', even without getting equity in exchange, but if you're serious about growing your business quickly there are other alternatives.

Bank loans: The bank will want to see your financial and business plans to decide if you're worth the risk and, the amount they're willing to lend will depend on their assessment of that.

Third party lending: Companies such as Funding Circle will lend money to businesses, but again will need to assess their risk – and will expect a juicy interest on their loan.

Remember that a loan will need to be paid back – they are not investing in your business, just lending you the money you need to move the business forward. This can be viewed as a positive as the ownership of the business remains yours.

Investment

To attract potential investors, you will need to do your homework and ensure your company is set up correctly. Read our last blog post for more on this.

You will be giving away a percentage of your business, so you'll need to be clear about how much your business is worth and how much you're prepared to give away.

Crowdfunding

The upsurge of crowdfunding platforms means that it's not as hard to raise money as it used to be. Before you jump online and start requesting funds, do your research. There are different types of crowdfunding platforms and they all operate slightly differently.

Some platforms are geared to equity investment, such as Seedrs and SeedInvest. This means that you are raising funds in exchange for equity. You'll probably need to get some investors up front to prove to the platform that your business has what it takes and then the platform will put your pitch live to the general public who can invest sometimes in increments as small as £5.

Platforms like Kickstarter and Indiegogo are based on raising funds in exchange for incentives, which might be pre-launch products, branded items or other items in a bundle. For instance, if you're developing a video game and you raise funds to support that process, offering pre-launch access to the game, effectively your supporters are purchasing from you in the form of a pre-order.

Funds raised like this aren't in exchange for equity, they are literally donations to support you. However, this counts as taxable income and that must be taken into account when you do your accounts. 

There are other platforms such as Patreon, where supporters effectively pay a patronage, either one off or on a monthly basis. This is popular with not-for-profit organisations, but again can be classed as taxable income for a profit making business and is commonly seen amongst social media influencers.

Before you make a decision on how you fund your business growth, get some professional advice from your accountant.