How to raise funds for business growth

Why seek business funding?

If you've got big plans for the future, you may need additional funding for business growth.

This might be for something as simple as boosting production or improving your cash flow. Or you might have more ambitious plans, such as buying another company. 

Whatever your goals, there are various ways to raise business funds for growth, each with its own pros and cons.

However, whichever route you use, it’s vital to have a strong business pitch.

The better you can communicate your business's prospects, the more likely you are to secure the investment you need.

What are the different sources of business funding?

There are a number of different ways you can raise finance for your business, but they divide broadly into two types: borrow money to be repaid later, or sell equity shares in your company.

You will however find a variety of funding options within each type, and the most appropriate for you will be determined by your circumstances, such as:

• The size of your company

• How much money you need

• The nature of your growth plans

• How much control you want to keep

Your borrowing options, which may include bank loans and peer-to-peer loans, through the likes of RateSetter for the latter.

Your investor options may include:

• Angel investors

• Venture capital

• Crowdfunding

Read on to find out more about each type.

Borrow from the bank

Almost all high street banks offer small business loans, generally between £1,000 and £50,000 and with relatively flexible repayment terms.

Securing a bank loan can sometimes be challenging - it’s more complicated than applying for a personal loan or mortgage. That’s because you must convince the bank that you and your business are a good investment and they will get their money back.

Learn more: are business loans tax-deductible?

A watertight business plan is a must (with figures and forecasts built into it by your accountant). You’ll also need to present a clear strategy for how your funding will be spent.

If you are seeking funding to buy a business, make your bank aware of the assets you’ll be buying, as these can strengthen your application (since you’ll be borrowing against them). Just remember to include liabilities too.

Peer-to-peer finance

Peer-to-peer (P2P) lending matches up smaller-scale investors with small businesses looking for funds, cutting out the middleman.

You apply online, and get a loan drawn from cash pooled by savers looking for a better return on their money.

This type of finance is easy and simple to apply for, and you can borrow as little as £1,000 or as much as £1 million. Repaying a P2P loan is similar to repaying a bank loan, with the interest rate agreed upfront.

However, if you struggle to repay then the usual rules about debt apply.

Angel investors

Angel investors are usually high-net-worth individuals who invest in early-stage businesses.

It’s sometimes called ‘seed’ funding, and you can generally expect to raise anything up to £1 million.

They will typically invest in exchange for a share of the business, so they must believe in both you and your business.

Usually successful business people in their own right, angel investors may have expertise and advice that can be as valuable as their money when it comes to growing your business.

Venture capital

The next step up from the angel investor is the venture capital (VC) firm. You might try a VC firm when you need a serious chunk of money (often in excess of £1 million) in exchange for a large percentage of your business.

VC is the fundraising method of choice for high-growth start-ups, many of which go through several rounds of funding before becoming profitable.

It’s a very competitive area, so you’ll need an outstanding strategy, a bulletproof business plan and a dynamite pitch – not to mention luck.

Crowdfunding

You can also raise funds online via crowdfunding. This works best with a consumer-facing business, with a product or vision that ordinary people can get behind.

You put out the message that shows why your enterprise is a good investment, and a (hopefully large) number of investors each take small stake in the business.

It’s essentially a digital-age version of selling shares, and has been seen to raise impressive sums – some companies have sourced over £4 million via thousands of micro-investors.

Use your own money

You can of course use your own money to fund your business, assuming you have enough. If your business is a company, then one way is to invest in share capital, by buying more shares.

This has the effect of increasing the assets of the business, but will tie up your money until you sell those shares.

You can however put money into your company on a temporary basis by lending it, via your director's loan account.

You can then have this money paid back to you when this becomes necessary or practicable.

Small business grants

You may be eligible for a small business grant to cover certain types of expenditure.

Government grants are available for startups and other small businesses to cover things like the cost of premises, plant, machinery and IT equipment.

Each grant will have its own application process and strict qualification criteria, so there is no guarantee you will be eligible.

But it is worth exploring your options, particularly if yours is a new business.

Here is where to find out about the various grants available in the different parts of the UK:

• Grants in England (and wider UK): Business Finance Support Finder

• Grants in Wales only: Business Grants

• Grants in Scotland only: Funding opportunities

Which is right for me?

Cost and convenience aren’t the only factors when seeking funding for your business.

Consider how each solution will fit into your long-term goals, and weigh up the risks of each one too.

Your main choice is whether to borrow or seek investment.

Borrowing means you retain a full stake in the business, but repayments can be an ongoing burden that may slow your growth.

Conversely, investment delivers a cash injection that you don’t have to repay, so growth may proceed more quickly – but you’ll have to share that growth with your shareholders.

Talk your strategy over with your accountant to narrow down the best options in your circumstances.

If you found this article interesting, you might also find our article on venture capital trusts informative, too.

Get expert financial advice

Raising funds for business growth can be challenging, but it can be made easier with expert advice.

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