Home Finance What funding options are available for new businesses with low capital?

What funding options are available for new businesses with low capital?

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One of the biggest hurdles that small businesses face when they begin is to find a source that can elevate their venture to a higher level. These are not only important for small businesses to run their daily processes but also to have a safety net behind them if they face any financial to sustain their businesses. We look at some of the main funding options available for new companies with low capital in this article.

Debt financing

Debt financing is the most basic way of getting funds for your new or small business where the owner applies for a loan with a bank or other organisations and have to pay a set percentage on the money they obtain. The amount of funds available depends on several factors, the biggest one being the potential. Banks especially are strict in providing loans for businesses and go through a stern evaluation and documentation process. In most cases, you have to follow and complete the tasks set in a specific time frame before the funds for the next job will be released from the bank. There also has to be some guarantee such as an asset that needs to be shown so that if you are unable to pay back the loan the banks have some leverage.

Credit Cards

Credit cards are fast becoming the go-to source for SME’s as the primary source of funding in the absence of a start up loan. According to a report, around 17% of small businesses use credit cards to grow or establish their business in the United Kingdom in 2018. It is a good option for companies who do not have any other alternative to go for. The disadvantage is that you invite the risk of failure because you need to show a regular cash flow to meet the monthly credit card payments. The interest rate is another factor that needs to be evaluated before choosing the credit card provider but is helpful even for new business owners who do not have a previous credit history.

Equity Finance

This type of option means that money is provided to a business in return for becoming an owner or partner in the industry. It means that the lender will provide cash, but you will not have to return that amount; instead, they will become a shareholder and will have a percentage in the profit you are making from your business. The main advantage of equity finance is that you do not have to pay any debt and will not owe any money so there will be zero chance of going bankrupt. You also will be able to make new connections through your investor who is good for business. On the other hand, you will have to spend a lot of time researching and evaluating who is the right business partner because not only will they share profits, and they will also be part of the decision-making process.

Crowdfunding

Crowdfunding is another unique and unconventional way of raising capital for your business. This method works on getting donations from people who are interested in the idea of your business model or the product you are selling. This is usually beneficial if you have a small business, and it is creative. You set a goal to achieve a certain amount in certain days, and then people, including your friends and family members can donate to your cause on different crowdfunding websites such as kickstarter.com. Keep in mind that this type of funding is not long-term but is a one-off payment where you can get a kick start for the idea you have been trying to bring in the market.

Invoice financing

Invoice financing is a way for businesses to get money against the amounts they are due to their customers. The basic principle is that you have the invoices through which you get a specific amount of money from the lender, and that is used to pay the employees, suppliers, and run the processes within the organisation before actually getting paid from the customer. In simple words, businesses are selling their accounts reversible to a third party that is called the factor at a specific discount. This is hugely beneficial for companies who need instant cash and are finding it hard to benefit from other sources.

Angel Investor

Angel investors or business angles are usually experienced people who have themselves run different businesses in the past and now are looking for opportunities to use their money and experience to invest into an innovative idea and get some percentage of return on the investment. There are different online websites and other platforms through which you can get in touch with people who are interested in investing. It is like pitching your idea to someone, so they can become a part of it. A thorough plan of a unique concept, your experience and knowledge about the product you are working on, management skills and communication will go a long way towards convincing an angel investor to bring in finance for your business.

Government grants and funding

Government grants remain the most popular way of starting and running your new business in the United Kingdom although it is getting extremely difficult to become eligible for them thanks to the competition. Usually the funding ranges from £500 to £500,000 depending on the criteria, the grant and the type of project that is under consideration. Some of the most common grants available for UK residents include the Prince Trust Grant that has been helping young entrepreneurs since the 1970s while the other options include National Apprenticeship Grant, Seed Enterprise Investment Scheme (SEIS), CRACK IT Challenges, EUREKA Eurostars and Horizon 2020

In conclusion, make sure you know the type of funding you need for your business as every venture has its own requirements and needs. You also have to make sure you have all the documents prepared so that if you apply for funding, you are approved without any delays.