The Why and How of Funding of Your Business

Even before the coronavirus, there’s no doubt that small businesses in the UK were becoming increasingly reliant on external funding and borrowing.

A British Business Bank Survey in 2019 found that 44% of SMEs had sought some form of external funding during the previous three years, for example, while this figure is only set to increase in the future.

But why do businesses need funding in the modern age, and what are the best ways for SMEs to source financial assistance?

startup funding

Why do SMEs Seek Out Funding?

There may be a number of reasons why SMEs require some form of funding, depending on their unique nature and the market that they operate in.

While some motivations will be intrinsically linked to growing a business over time, others are focused on funding everyday operations and negating the challenges posed by extended invoice terms.

In fact, the single most popular reason for SME funding is to create sufficient levels of working capital, which is central to every functional business and a key indicator of financial health.

Similarly, a growing number of today’s small businesses struggle to create viable levels of working capital or cash flow without external funding, with invoice terms of 60 or 90 days making it particularly hard for startups to cope in the short-term.

As a result, firms may well seek out short-term loans or options such as invoice financing, which enables entrepreneurs to sell their accounts receivable and receive an immediate cash boost.

Firms may also seek out cash to fund asset purchases, typically in the form of new machinery or vehicle fleets. This enables you to cover any funding gap that exists within your business, such as instances where you’re able to account for working capital expenses but lack the resources to expand or increase your output.

This type of borrowing is also becoming increasingly popular, particularly as companies look to realise their growth plans in a challenging economic climate.

What are the Best Funding Options for SMEs?

One of the first funding options that SMEs often seek out is family and friends, as this is typically affordable and may negate the impact of interest repayments.

However, this funding method is fraught with risk and danger, as the failure to repay your loan could lead to the breakdown of key relationships and cause untold damage over time.

In some cases, your business may be able to qualify for a research and development grant, with hundreds of schemes open from the Prince’s Trust to the global investor UnLtd Social Enterprise Funding.

The issue here is that such grants are often restricted to specific industries or geographical locations, while applications will most likely be subject to some heavy and difficult to meet criteria.

Perhaps the most accessible and balanced option in 2021 is crowdfunding, which is widely available online and through social media. This type of peer-to-peer lending has certainly become increasingly popular during the digital age, with equity crowdfunding particularly popular amongst investors and ideal for those in search of meaningful funding.

On a similar note, SMEs can also seek out small business loans online in the digital age, with this type of funding available to be used at your discretion and throughout the business as a whole.

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.