This is a guest article by David Friel, Founder of Entrepreneur Handbook. Entrepreneur Handbook is an expert advice and information platform for entrepreneurs which David founded whilst at university. He also loves tea, sailing and working too much.

Photo credit: Pictures Of Money

When it comes to raising finance for small businesses, there is often a presumption that the only options are to find investment or take out a loan.

Although these are sometimes good options, there are also many more funding sources, and in many cases, these can even be more accessible and more relevant depending on the business and the entrepreneur. Below you’ll find a breakdown of some of the options available.

Grants (For any stage of start/growth)

In the context of business, grants primarily provide free financial support to businesses who meet a certain criterion. This results in a huge range of grants available to small and growing businesses in the UK. Grants are often one of the best ways to raise capital early on especially if you’re in pre-product or in idea stage, or have just launched your business. Grants usually range from £500 to £10 million depending on the funding scheme. There’s also a real mix of private and public grant schemes but the majority are public and government backed/run.

On the downside expect to do a lot of paperwork, for any grant there is usually a pretty rigorous application and judging process that will require a lot of time be put into the application/pitch if you want to have a good chance of gaining a grant for your business. There’s also an increasing amount of competition as the amount of money on offer goes up.

Business competitions (For start stage primarily)

There are a lot of competitions that provide funding, resources and support for business ideas, business growth, protecting the environment and much more. It’s well worth exploring what competitions are available at the moment and if you’re eligible to apply. This type of funding is often with no strings attached and in many cases not many people/companies apply, giving you a real shot of winning. The downside as always, is that you may not win so be careful with how much time you invest into applying for competitions and awards.

Top tip: Take a look at your Council’s website for local business competitions that are often overlooked and not highly promoted. Speak to your careers and enterprise team as well, as often universities run business competitions with £1,000 – 5,0000 of funding.

Loans (For any stage of start/growth)

Securing a loan for your business typically involves you borrowing a sum of money from a bank whilst agreeing to pay back the amount borrowed with interest over a certain period. Generally speaking, there are two types of loans:

  1. Secured: The majority of business loans are secured, meaning you have an asset of equal or greater value to the amount borrowed that you agree the bank can possess if you fail to repay the loan, i.e. Office building, equipment… At an early stage, as you typically need to have a good trading and financial history with some collateral to raise a secured loan, banks in recent years have also been lending less and less. Bear in mind that it may not be so easy to gain a loan for start up but it’s much easier for growth.
  2. Unsecured: Unsecured loans are made without any kind of guarantee or asset given by the company/ person borrowing the funds. Although they’re now very popular be careful of the high interest rates, terms and the credibility of your lender when looking at unsecured finance. You can lose a lot of money and even go bankrupt if you’re not very careful.

Overall, loans are a very flexible way to raise finance for growth with some good options and providers available, although for a short-term plan they are not really the best solution.

Top tip: Crowdfunding companies are now offering loans funded by peer lenders with very good rates and the government also backs the startup loans scheme for loans up to £10K+ for startups. (Make sure though you understand that startup loans mean taking a personal debt and not a company debt!)

Venture capital (For any stage of start/growth)

Getting VC investment means you’re raising money from professional investors in exchange for equity. Although VC is typically reserved for companies in growth stages and raising millions, it’s less commonly known that many VC funds in the UK/EU fund companies for £350K or less, meaning that on many occasions there are companies at an early stage or just starting who raise VC funding.

The plus side is that if you need further funding, then it’s likely that a VC could provide this. You also have access to experienced mentors, a great network and resources that are there to support you.

The downside is that at any stage of funding, a VC will typically seek to buy 25% or more equity in your company. Their help, resources, and investment isn’t cheap.

Top tip: It’s not just about the money! A VC will likely have a seat on your board and will be experienced in protecting their interests/ investments. Make sure that you’re bringing the right investors on the journey with you.

Business Angels (For start stage)

Angel investment involves the raising of funds from wealthy private individuals in exchange for equity in your company. It’s one of the biggest growth areas in small business funding, with typical deals taking place between £10 – 150K.

The plus side of Angel funding is that if you find an investor, it’s much easier to gain said investment because there are less expectations/barriers in terms of paperwork, traction and finances. However, you’ll still need a decent plan, deck, team and something worth investing in.

In the UK, finding funding from an Angel is harder than raising institutional money such as venture capital compared to countries such as the US, you’re also likely to achieve a lower valuation than that in the US. This is because Angel investment is relatively new in the UK and the aversion to risk is quite high among inexperienced private investors. Still, Angel investment is growing in the UK and as it becomes more mature it’s likely to improve.

Crowdfunding (For any stage of start/growth)

Crowdfunding involves raising funding from lots of individuals to equate to a large amount, historically this amount would have been provided by one or several investors or a bank. It’s an alternative form of finance that’s gained a lot of popularity in recent years. Although there are many types of crowdfunding, there are two that really matter to businesses:

  1. Equity crowdfunding – Using companies like Seedrs or Crowdcube you sell a part of your company in exchange for investment funds from many small investors aggregated together.
  2. Pre-sale crowdfunding – If you’re a product–based company, Kickstarter and IndieGogo allow you to raise finance to create or further develop a product by preselling it to what are effectively investors and customers. They pay a small amount to back the product development and receive the product generally between 6 – 24 months later.

The best option for your business really depends on your model. SaaS, tech and media companies will typically only be able to raise via equity, whereas companies developing new physical products can raise via pre-sale or equity.

Crowdfunding is an exciting and new option but be mindful of two key points:

  • Many equity crowdfunding platforms allow people to invest directly in you. You could end up with 2,000 shareholders, which is more than a headache! Some offer nominee structures, where they act on the investors behalf, look for these companies!
  • Make sure you will be able to deliver a product you are pre-selling, many companies are now being sued by syndicates for not delivering products they pre-sold.

Your own funds (For start stage)

If you have the money, personally funding your business can be a good option. There is however always a pretty big risk you will lose all the money you invested. To minimise your potential loss, it’s a good idea to limit the money invested in the business initially to 25-50% of what you can afford/ think should go in, you can then release further money on meeting goals such as revenue or growth. This limits your overall exposure.

Top tip: If your business starts losing money and you find yourself in need of finance avoid plugging the hole with personal finance, you will eventually or quickly exhaust this option leaving you with nothing. Be very careful to separate the businesses money and your own!

Friends & Family (Any stage of start/growth)

There’s an old phrase that says: “business and friendship don’t mix” and in many cases, that’s good advice. That said, many founders raise their initial funding from friends and family. If you’re going to do this though, it’s important you manage expectations and are very clear on whether the money is a loan or a gift, otherwise you risk severely damaging your personal relationships and support network, which can be more critical than money at an early stage.

Top tip: Make it very clear to anyone who gives you funding how much risk is involved and that the business could fail and their money could be lost.

Photo credit: Pictures of Money