One of the biggest challenges entrepreneurs face is getting financing to help an existing SME (small-to-medium enterprise) scale and reach new heights.
Convincing investors to support your business can be extremely difficult and you may not have sufficient savings to finance business expansion. Fortunately, there are several ways to raise funding for your SME.
In this article, we will discuss how to get financing for a small business and how to overcome common financial challenges.
Option 1: Family & friends
Many entrepreneurs seek small business funding from family and friends in the early stages. This option can be a great way to get initial financial support to prove your company can be successful, at which point, you can seek other small business funding.
Getting financing to start a small business from family and friends is usually quicker and more flexible. However, keep in mind that borrowing money from loved ones can cause arguments and damage relationships if things go wrong.
Read this guide by Xero for the pros and cons of raising finance for a small business from family and friends.
Option 2: Business bank loans
The traditional way to gain access to finance for an SME is through a bank loan. Almost a third (27%) of SMEs said that they were financed by loans according to the British Business Bank survey 2018.
Pros and cons of business bank loans
Traditional bank loans remain a popular type of SME funding. They can offer a simple and effective way of financing growth and you won’t have to give away any equity in your business.
The process of applying for a business loan can also be a long and tedious process and many banks have strict lending criteria, meaning a large number of applications are rejected. Government statistics show that the rejection rate for first-time SME borrowers is around 50%.
Things to consider when applying for a business loan
If you are considering using a bank loan to finance SME expansion, make sure you research the various types of loans, the terms, and the interest rates that come with each option.
Entrepreneurs that are turned down for a bank loan must seek alternative SME financing.
Option 3: Angel investors
Angel investors can provide access to finance for SMEs. They are typically high-net-worth individuals who provide capital in exchange for an equity share in your business.
Data on Statista shows that the value of business angel investments in the UK amounted to over 142 million euros in 2020. This makes the UK the country with the highest value of business angel investments via angel networks in Europe.
Pros and cons of Angel Investors
The biggest advantage of seeking small business funding from angel investors is that they can offer valuable advice and mentorship that will support SME growth.
The drawback is that you will likely have to give up some of the control and equity in your business in exchange for funding.
Option 4: Venture Capitalists
Venture Capital offers another way for entrepreneurs to access small business funding.
Investors are usually wealthy individuals or groups that invest large amounts of money into SMEs that demonstrate high growth potential. Small business funding is provided in exchange for equity in the company.
Pros and cons of Venture Capital
An advantage of Venture Capital is that investors are often experts in their fields and provide mentorship to help the business grow quickly. This allows them to realise a good return on investment in a short time frame.
The biggest downside of raising funding for a small business through Venture Capital is that you will usually have to give away a large percentage of your business in exchange for capital.
Option 5: Search Funds
A Search Fund is an investment vehicle that provides talented entrepreneurs with the funding to acquire and take control of a small yet established business.
Similar to the Venture Capital model, Search Fund entrepreneurs receive valuable support and mentorship from a team of experienced investors. Once a suitable company has been found and acquired, additional financing can be injected into the business to fund its growth and help it scale further.
The Search Fund model is growing in popularity in Europe and the IESE’s International Search Funds 2020 report shows that Search Funds are becoming one of the fastest-growing niches in the alternative investment sphere.
What is so great about Search Funds?
At Moonbase Capital, we think active investors add significant value through their participation and we believe that a strong support network is vital for entrepreneurship success.
This is why we have created an advisory group that can offer dedicated support, alongside our Managing Partners who have more than 50 years of combined SME experience.
Check out our recent blog to find out what makes Search Funds so special.
What is the best type of small business funding?
It costs money to run a business and deciding how to finance your SME is one of the biggest financial decisions you will make. The best small business funding will depend on several factors such as your cash flow and the amount that you need to borrow.
Weigh up the pros and potential risks of each option and choose the best small business funding for your company.
Contact us to find out more about Search Funds
Get in touch with Moonbase Capital if you would like to learn more about the Search Fund model and how it can be used to fund the acquisition and potentially further financing of a small yet profitable business.
