Raising business capital can seem daunting – whatever your reason for needing the funds. Whether it’s to help with startup costs, preparing to expand or simply to help with cashflow, it can be hard to know where to start.

But we’re here to take the pain out of the process with our simple guide to demystifying the whole process.

Which form of capital is right for my business?

It’s vital you think about this early in the process. Different funding options come with different interest rates, fees or equity trade-offs and the wrong choice could hinder growth – or put unnecessary strain on your cashflow.

Things to think about include:

  • Where are you on your business journey?
    Are you a startup or established business looking to expand?
  • Is retaining control important?
    Are you willing to give up equity in your business or would you rather retain full ownership?
  • Can you make the repayments?
    If you don’t think you can, a grant (if available) or equity financing might suit you better.
  • How quickly do you need the funds?
    Some options may take longer to complete so think about how quickly you need access to the funds.

It’s important to remember that not all loans are the same and the best option for your business will depend on factors like your financial needs, growth plans and the level of control you wish to retain over your company. Each loan will come with its own pros and cons.

Here are some of the options that may be available to you:

Business loans:

These are one of the most common ways to raise capital, providing a lump sum which must be repaid with interest over a set period. They could be:

  • Bank loans:
    These usually require a good credit history but can offer lower interest rates.
  • Alternative lenders:
    Online lenders and financial technology companies known as fintech provide faster, more flexible loan options but may charge higher interest rates.

Pros:

  • Predictable repayment terms allow you to plan ahead.
  • You retain full control of your business.

Cons:

  • A strong credit history or collateral may be needed to qualify.
  • You must repay the loan even if your business isn’t profitable.

Grants:

These are non-repayable funds provided by governments, not-for-profits or private organisations to support specific types of business or projects. These include:

  • Small business grants:
    Typically available to businesses meeting certain criteria, for example those operating in specific industries.
  • Innovation and research grants:
    Available to businesses involved in research and development or those developing innovative technologies.

Pros:

  • You don’t have to repay any funds.
  • Your business credibility and visibility can be boosted.

Cons:

  • The application process can be competitive.
  • Grants can come with restrictions about how the money can be used.

Equity financing:

With this type of financing, investors provide capital in exchange for a share of ownership of your company. This can be very attractive for startups and those businesses with high growth. Options include:

  • Angel investors:
    These are individuals who invest in early-stage businesses in exchange for equity – think Dragons Den.
  • Venture capital:
    These are firms who invest large sums of money in businesses with the potential for high growth.
  • Crowdfunding:
    Typically available online, crowdfunding raises smaller amounts of money from a larger number of individuals who then have a stake in your company.

Pros:

  • Nothing to repay.
  • May provide valuable expertise and connections from investors.

Cons:

  • You may have to give up a portion of ownership and control.
  • Investors may expect rapid growth and high returns.

Asset-based financing:

This is where you use valuable assets such as equipment, vehicles or property as collateral to secure financing.

  • Invoice financing:
    Using unpaid invoices as collateral to access funds while you wait for customers to pay.
  • Equipment financing:
    Borrowing money to buy equipment which itself serves as collateral.

Pros:

  • Provides quick access to capital.
  • Can help maintain cashflow.

Cons:

  • You may lose your assets if you’re unable to repay the loan.
  • Interest rates can be higher than more traditional loans.

What are the next steps?

Once you’ve chosen the right option for your business, think about the following:

  1. Research lenders or investors:
    Whether you’re looking for a loan or equity investors, shop around for the best terms and interest rates.
  2. Submit your application:
    Ensure your business plan and financial statements are in order before applying for loans or pitching to investors.
  3. Negotiate terms:
    A strong business plan can give you leverage so don’t be afraid to negotiate interest rates, loan terms or the percentage of equity you’re prepared to give up.

How do I prepare to raise business capital?

Before you apply, ensure that your business is in a strong position to attract investment or qualify for loans. You’ll need:

  • A solid business plan:
    This should include detailed financial projections, market research and a clear growth strategy. Investors or lenders will want to see that you’ve thoroughly thought-through your business model and that you have a plan for how you’ll use the funds effectively.
  • Financial statements:
    Make sure you can provide up-to-date financial statements, income and cashflow statements. If you’re just starting, be ready to provide personal financial information.
  • Collateral:
    Collateral is sometimes needed so you may be required to offer assets such as equipment, vehicles or property as security for any loan.

Finding the right funding option is essential for your business’s long-term health and your ability to grow and sustain it. Whichever type of lending you go for, taking time to understand each option available to you – and preparing well – will increase your chances of success.