Funding for your small business

Finance and legal

9 August 2016

What's the best way to fund business growth? Banks may seem the natural first port of call for business financing, but there are now lots of other funding sources that may provide more bang for your buck. Thanks to the rise of alternative financing, the options for funding your business are greater than ever.

Conventional loans tend to have fixed, inflexible terms, and interest rates can leave borrowers paying back much more than the original sum. It's no surprise, then, that 22% of SMEs pinpoint the cost of finance as a barrier to growth1.

However, banks aren't the only option – and, fortunately, there are now lots of other lesser-known funding sources.

1. Government grants and investment schemes

The government has introduced a range of grants and business investment schemes designed to help SMEs, yet our research indicates only 6% of businesses have taken advantage of these2. The benefit of government grants is that they usually don't need to be paid back and don’t require giving up any equity – so, unsurprisingly, competition is intense and the application process is rigorous.

Government investment schemes, such as the Seed Enterprise Investment Scheme (SEIS) also help SMEs get access to funding by encouraging investors to put their money into small early-stage and high-risk businesses in exchange for tax relief. To find out if your business qualifies under the SEIS scheme, check the list of requirements.

2. Enterprise Zones

Although Enterprise Zones were first launched in April 2012, and are now established in over 24 areas across the UK, our research found that one third of small business owners hadn't heard of this government-driven initiative2. Enterprise Zones provide a range of benefits, including:

  • Up to 100% business rate discounts
  • Simplified local authority planning, making it easier to get permission to build new sites or apply for a 'change of use'
  • Availability of superfast broadband
  • Enhanced capital allowances (tax relief) for certain industrial businesses making large investments in machinery

Considering the range of discounts and benefits available, it's worth looking at Enterprise Zone locations if you're planning on starting up a new business, or relocating your existing operations.

3. Peer-to-peer lenders

The rise of peer-to-peer lenders like Funding Circle and RateSetter grew out of the recession. Start-up lenders decided they could pool savers' finances and offer small businesses loans with better interest rates.

Like a regular loan there are financial prerequisites, but the attraction is the availability of relatively low interest unsecured loans, the flexibility in the length of loan repayment terms and the speed with which the cash is released.

4. Crowdfunding

One of the tech business buzzwords of the last few years (but only recognised by a fifth of UK SMEs2), crowdfunding is considered by many as a fantastic way to raise capital whilst also raising your profile and generating publicity.

Like peer-to-peer lending, crowdfunding relies on a large number of investors providing capital via an online platform. The key difference is what you need to do for the money, and what your investors expect in return.

While loans concern your financial history, credit score and the risk those represent, crowdfunding is all about your message. That's how compelling your product is, and how convincing your business plan is. Once the investors are on board, they'll expect either products delivered to a high standard or a share of your business.

The major players include Crowdcube and Kickstarter, although they have quite distinct models: Crowdcube allows you to offer an equity stake in your business in exchange for investment, while Kickstarter investors offer pledges in exchange for rewards. Both platforms stipulate that you can't keep any of the investments pledged unless you meet your full funding goal.

While crowdfunding has plenty of advantages, it's important to remember that your ideas aren’t automatically protected when you put your pitch online – so unless you have a watertight patent, you risk exposing your USP to competitors.

5. Angel investors

Both investors and venture capital funds provide funding in exchange for a share of your business, often providing additional support like useful contacts, advice and even office space. This is known as equity finance.

Angel investors are high-net-worth individuals who can bring not only cash, but also expertise, to help your business grow. Individual angels will typically look to invest anywhere from £5,000 to £150,000 in a business, though syndicates of angels may band together to offer larger sums.

According to an ICAS survey, however, many small businesses remain suspicious of investors encroaching on their freedom. A 2015 report by British Business Bank found that just 1% of small businesses had taken advantage of equity finance in the preceding three years.

While angels can provide valuable advice and insight, it's important to note that they often expect a big return on their investment, and may ask for a significant stake in your business, as well as long-term decision-making involvement. So, if you go down this route, make sure that you and your angel have the same vision for the business, and that there's a good personal fit. While losing control is a valid concern, expert support could be just as important as cash flow when it comes to business success – so it's worth weighing up.

Whichever path you choose, it's important to remember that although funding may be essential, the terms on which you access it will affect how your business grows.

1Federation of Small Businesses survey of 1,782 members (December 2014)

2AXA Business Insurance survey conducted in three waves: October 2015 (300 UK small businesses), April 2014 (500 UK small businesses) and August 2014 2014 (350 UK small businesses)

Win £25,000 to launch your business with AXA Startup Angel

You could be just one pitch away from making your business dreams a reality. Win £25,000, mentoring from the AXA Startup Angels and business insurance for a year thanks to AXA. What are you waiting for? Entries close 17 July 2022.