New funding methods for smaller businesses

5 years ago

“How are we going to grow our business?” is a question that’s never far from a small business owner’s thoughts, and they can never be truly free to run and grow their business unless they are confident in their financing.

A previous Sage One blog post discussed some Sage One-sponsored research undertaken by Enterprise Nation which resulted in 10 recommendations to the UK Government for encouraging growth.

Amongst the top findings were statistics which indicated that of the 95% of small businesses looking to grow over the next year, 54% were looking to use working capital and 41% were expecting to fund their growth by using savings. Only 7% looked to bank loans, with the remaining 7% going for external investment.

Many small businesses are looking to use their own money (or that of friends and family) to fund their growth, and are either reluctant or unable to fund their growth through debt.

Bearing in mind this inherent need or desire to “bootstrap,” (‘to get into or out of a situation using existing resources’) keep costs low and preserve business freedom, there are several new services, funding sources and new models for fund raising which are worth knowing about. Grant finding aside, which is industry-specific, here are some clever new financing ideas which excite us:

Clever New Services

A recent BBA study found that in 2012, lending by banks to growing businesses fell by 80%. At the same time, large corporations are taking longer to pay invoices – taking advantage of the dominant position they hold. The unfortunate result is that at a time when our economy desperately needs young businesses to grow and breathe life into it, their ability to do so is being stifled.

A number of smart ideas have emerged which address this problem area where small businesses are most vulnerable – the dreaded ‘cashflow’. One example is MarketInvoice, whose founder, Anil Stoker, is a Sage Business Expert.

What they offer is a new way to go about an established funding practice known as invoice factoring. This is where you sell unpaid invoices which due at a future date to someone right now, for cash in hand. Typically you receive about 85% of the value of your invoice, with the advantage being that you get cash in hand quickly and pass on the risk of the invoice not being paid to another party.

MarketInvoices’s online platform takes the middleman out of the process by allowing investors to directly browse and purchase invoices, reducing transaction costs and potentially increasing the speed with which business owners receive the money owed.

Crowdsourced finance

Another funding concept which has emerged recently is crowdsourced finance or ‘crowdfunding’. This is the collective effort of often lower net-worth individuals to network and pool their money together in smaller chunks to fund businesses.

Earlier this year, Reuters reported crowdfunding had helped companies and individuals worldwide raise $2.7bn (£1.7bn) from the public in 2012 – an 81% increase on the previous year. This year the total is predicted to hit $5.1bn (£3.3bn).

Crowdfunding is most well-known for sites such as Kickstarter, where people showcase specific products that have yet to be made, and people ‘back’ them in order to receive the product (and sometimes additional rewards) when the product is launched.

The advantage to businesses is that you can test the demand for a new product before spending a lot of money on product development – if enough people want your product then they’ll give you money to make it, and if they don’t then you’ll find out before you spend your time and money to develop and market it.

A newer and less established form of crowdfunding is for equity. A string of new UK crowdfunding sites are giving ordinary people the chance to invest, Dragons’ Den-style, in smaller businesses. These sites include Seedrs and Crowdcube, both of which allow a minimum investment of £10 in exchange for equity.

A New Era of Bootstrapping

Despite being the obvious first ports of call for funding, banks and investors are not the only sources of finance for business growth – and often not the best. Embrace new funding ideas, explore traditional grant applications and, as ever, make efforts to keep costs low so that you can self-fund.

Grow your business online with Sage One

At Sage we have a range of products to suit the needs of start-ups and small businesses and recently launched Sage One Accounts Extra, an online accounting service that’s perfect for established and High Growth Businesses.

As well as advanced cash flow management, quotes, income, expenses and VAT, Sage One Accounts Extra offers powerful features that let businesses trade internationally, control how they share accounts data with trusted colleagues and get real insights into their finances and future with business forecasts and more.

Within a couple of clicks, you can work in real time with your accountant or other members of your team and connect to other powerful business apps. And if you ever have a question, our UK-based support team are a phone call or email away, 24/7, 365 days a year.

Sage One accounting services range from just £5 + VAT per month to £25 + VAT per month, depending on the size and needs of your business. Find out more on our Accounts Range page where you can also sign up for a free 30 day trial.