Getting any new business off the ground is a struggle. You need proper financial backing, but where do you start? From business loans to investment opportunities, raising finance for a business starts with knowing what financing opportunities are available.

To help make the process easier, we’ve compiled an in-depth guide on how to finance a business, including the different financing options available during the various stages of your business.

Our step-by-step guide on how to finance a business

Step 1: Prepare your figures

Do your due diligence before seeking out investment opportunities. Knowing exactly where you’re at in a financial sense will make it far easier to snap up investors and funding. Create a business plan, dig into your numbers, and map out a forecast for the future to give potential investors an idea about where you’re heading.

How much financial info do you need to provide? It totally depends on how far you are into the journey. For example, are you a new start-up or have you been trading for six months, a year, or more? If you’ve already started trading, you’ll need to produce financial statements and reports showing that you can take your business to the next level.

You'll need to show:

  • Net profit
  • Sales
  • Margins
  • Cash flow
  • Customer acquisition cost
  • Churn rate
  • Debt
  • Accounts receivable turnover
  • Break-even point
  • Personal investment

These numbers should be readily available if your business is in full swing. If you’re just starting out, you’ll need to make sure you research these figures or estimate as accurately as possible.

Step 2: Determine how much financing you need and why

Having a strong idea of how much investment you are looking for and where that money will go (fund allocation) is crucial. Investors are looking to make money, so they want to know that you have a clear understanding of what you need and how it will grow the business.

There are plenty of reasons you could look for investors, including:

  • Building your start-up
  • Capturing market share
  • Getting value from investors expertise or networking opportunities
  • Attracting attention for future investors
  • Growing your reach to increase your bottom line
  • Manufacturing your product
  • Expanding your team

Step 3: Choose the right financing option

There are plenty of options available when it comes to financing your small business - the hard part is researching them all and choosing the right one. We’ve done a lot of the hard work for you here. Each of the options listed below has its pros and cons. It’s vital that you have a clear idea of what you need the investment for and also what that investment is worth to you as a business owner. 

Here are a few financing options available:

Bank loans

Traditional bank loans are the most popular source of funding for many businesses. That said, they can be risk-averse, and it can be challenging to get banks to invest in a start-up that doesn’t have any hard and fast financial figures. If this is you, look into start-up loans designed for businesses in their first two years of trading.

Pros

  • They tend to offer lower interest rates
  • You aren't required to give up any equity in the business

Cons

  • The process can be tedious
  • Banks can be risk-averse
  • Banks also tend to prefer certain business types over others (i.e. limited companies over sole traders)

Venture capital

Venture capitalists (VCs) are an external group that will invest in your company in exchange for equity in the business. The equity percentage varies depending on the valuation of the business and the amount invested.

Pros

  • Access to expertise
  • Established business relationships and networks
  • Can accelerate growth dramatically

Cons

  • You have to give up equity in your business
  • Funders may be involved in the day-to-day running of your business

Incubators and accelerators

Programs like incubators and accelerators are designed to give businesses an initial ‘boost'. They focus on scaling and growing ambitious start-ups by providing seed investment and mentoring in exchange for equity in the business.

Pros

  • Many include business development programs
  • Access to expertise and networks
  • Start-up teams are grown into their roles and supported

Cons

  • Selection processes can be gruelling
  • May require time commitments/schedules to be followed

Government grants

Government grants are there to support new businesses in specific sectors of the economy. Grants each have different criteria, and some may require you to match their investment amount.

Pros

  • No repayments are needed
  • No loss of equity
  • Widely available

Cons

  • The selection process is reserved for small businesses
  • Short-term solution

Friends and family

It isn't uncommon for friends and family to offer you support in your new venture, usually as a customer, but sometimes as an investor too. While it may give you flexibility, you have to consider its effect on your relationships. Be honest and open, and make sure to put formal agreements in writing.

Pros

  • Quick funding with flexible terms
  • No loss of equity
  • Comes with a built-in support network

Cons

  • Investment amounts could be limited
  • Personal relationships may suffer
  • Investors may not be very experienced

Business credit cards

Funding business growth with credit cards affords flexibility because they can be used for day-to-day expenses and can be used by different members of your team. Credit cards also have additional rewards and benefits such as 0% on purchases for a specified time, air miles, and cashback opportunities. However, this financing option tends only to be available for established businesses.

Pros

  • No loss of equity
  • Multiple members of staff can have access
  • Flexibility on spending

Cons

  • Interest and annual fees
  • Expensive form of borrowing
  • Smaller loan amounts

Crowdfunding

Crowdfunding works by pitching your business online and offering incentives, perks, or rewards to people for investing in your business. This form of funding is often used to raise funds for new or existing companies to fund future growth opportunities.

Pros

  • No repayments or loss of equity
  • Great way to get financing for business ideas that may not appeal to conventional investors
  • It helps you test the public’s reaction to your business idea

Cons

  • No guarantee of funding
  • It may take a while to raise capital if you don’t already have a following
  • If you don’t reach your funding target, you may need to give all pledged financing back to your investors

Step 4: Prepare your application and documents

Once you’ve chosen the right type of investment for you, you'll need to prepare your paperwork. If you have meetings set up with potential investors, do your homework on who you’re meeting to prepare yourself.

Make sure you have the below paperwork to hand:

Cover letter

A well-written cover letter is often overlooked by new entrepreneurs. It should be a persuasive icebreaker that gives potential investors an insight into your business idea.

Business plan and executive summary

Your business plan with an executive summary is an essential document, and all investors will want to review them before even considering investing.

The executive summary should include all relevant facts about your company, products and services, and your target market. It should show that you have a firm understanding of your target market's demographics and demonstrate your value proposition to the market.

Your business plan identifies how the investor capital will help you reach goals and milestones over the immediate future - usually over the next 18 months.

These should be positive but also realistic. A well-formulated growth plan, as opposed to lofty projections, will serve you better in the long run. Pitch deck presentation

Your pitch deck is like a marketing presentation. Its purpose is to provide a brief, informative overview of your business. It should include:

  • Vision and value proposition
  • The problem you are solving
  • Target market and opportunity
  • The solution you are providing
  • Business model
  • Traction and validation
  • Marketing and sales strategy
  • Your team
  • Financials
  • Competition analysis
  • Investment required and planned use of funds

Is financing your business the right decision?

While some businesses grow organically, many will need some form of financial backing to increase revenue. This is when you need to look into the different financing opportunities.

However, there are certain cases where financing your business might not be the right choice—for example, if you’re borrowing money to get your business out of a hole or getting financing for no apparent reason.

Below are a few instances where financing your business is the right decision:

  • You have a clear strategy on what you will use the capital for and how it will grow your business
  • Your business is ready for growth and a capital injection
  • You already know how and when you will pay the borrowed capital back

Later-stage financing options

After your initial investment, you may need to look at ways to find additional funding for a second-stage growth plan.

Below are a few options for how to finance a business once you’re past the start-up phase:

Debt funding

Debt funding, also known as debt financing, is a way of raising capital by borrowing a sum of money. This capital will need to be paid back at an agreed later date, and usually has added interest.

Pros

  • Repayments are usually tax-deductible
  • No loss of equity

Cons

  • Repayments are required regardless of revenue
  • Interest to be paid to lenders
  • May need to put up collateral

Follow-on capital

Follow-on capital is further financing from investors who have already put money into your business.

Pros

  • Efficient deployment of capital
  • May include more than the initial investment

Cons

  • May lose board seats to investors
  • You need to convince investors all over again

Venture capital

Some venture capitalists focus on later-stage investing, looking to provide capital to companies that are gearing up for growth. Same as with venture capital for start-ups, VCs will invest in your company in exchange for equity in the business. The equity percentage is variable depending on the valuation of the business and the amount invested.

Pros

  • Access to expertise
  • Established business relationships and networks
  • Can accelerate growth dramatically

Cons

  • You have to give up equity in your business
  • Funders may be involved in the day-to-day running of your business

Angel investors

Angel investors are generally wealthy individuals who provide funding in exchange for equity in your business. The vital difference between angel investors and VCs is the investment amount, with VCs generally offering more. 

Pros

  • No repayment is required
  • No cost involved 
  • More willing to take risks

Cons

  • Loss of equity
  • Loss of control of business

How to raise finance for a business the right way

All business funding options have risks and rewards that you need to weigh up. To make the most of the various financing options available, you first need to understand the pros and cons of each and how they affect your business.

Figuring out how to finance a business can easily turn into a full-time job. It can be a draining search, but working with the right investors can take your business to the next level by offering the support, resources and expertise needed to grow your business.

Putting the time into researching the proper type of investment, being purposeful with your pitch, understanding your needs, and having a clear goal for your company will make your journey infinitely more manageable. 

At Uncapped, we offer investment capital with offers ranging from £10k to £5m through a revenue share agreement similar to a merchant cash advance. See if you qualify!