Introduction to Small Business Funding

by Qardus Team

Posted 18/06/2021

The success of your business depends on three factors - your product, your marketing and your funding. Most businesses fail not because of their product or their marketing, but because of cash flow problems. It's poor funding that brings them down.As an entrepreneur and business owner, it's easier to get excited about your products and their potential, rather than about your finances. But without secure financial foundations, that excitement can soon turn to frustration.Cash will flow into your business as you sell. But in order to sell you first need money to invest in stock, people and premises. Whether yours is a startup company or you're looking to expand, you need funds to invest in advance of starting to see sales coming in.There are many different forms of business funding. Here are some of those most commonly used by business owners.

Your own money

Many small businesses rely on the founder or owner providing at least some of the capital. There's always an element of risk in starting or growing your business and by funding it yourself, you're not accountable to anyone else. This does mean, however, that if the business doesn't grow as you hope, you risk losing some or all of the money you've invested.Using your own money allows you to be in full control of how you run the business. However, you could be missing out on the advice and guidance that's often available when you're borrowing from someone else.If you're starting a new business, or expanding your current business into a new market, you should anticipate costs being higher than you expect and allow a generous contingency to cover the unexpected. Small businesses don't grow without some mistakes being made, and these cost money. In the longer term, you learn from these mistakes, and they help you make better decisions in the future. However, if you're working on a very tight budget, these costs could seriously hold you back.

Friends and family

You may know people who are open to investing in your business. Some may be willing to give you a loan, quite possibly on generous terms such as with low or no interest and flexible repayment terms. Others may want equity in return for their money - they effectively become co-owners of the business, although probably only owning a small slice.It's for you to determine whether friends and family money is appropriate. It can be very convenient, and flexible, but at the same time you need to be aware of how financial arrangements can affect your relationships with people close to you. If all goes well, there's unlikely to be a problem. But if the business struggles, they may become concerned or even demand some of the investment back.When borrowing from friends and family, it's a good idea to draw up a document that will help to set everyone's expectations, both for how much involvement they will have in running the business, and how and when they will be repaid. They should be made fully aware of the risks involved when putting money into a new venture.

Grants

A grant is money that does not usually need to be repaid. There are various local and national grant schemes available to businesses, usually linked to startups, growth or innovation. They can range in size from just a few hundred pounds to many thousands, even millions.While grants can be hugely beneficial to entrepreneurs, they can also be time-consuming to apply for and sometimes come with quite stringent conditions. Many grants are based on match funding, meaning they won't cover the full cost of a specific project - you are expected to raise some of the funds from elsewhere.

Secured loan

A secured loan is where you borrow from a bank or other institution and if you fail to make repayments the lender has rights over an asset that you own, such as your home or business property. Because the loan is secured on an asset the lender has confidence they will get some or all of their money back, should you run into financial problems.It can take a few weeks to set up a secured loan because legal documents must be drawn up and signed off. The advantage of such a loan is that because it's secured, you may get more favourable terms, such as lower interest charges or a longer repayment term. The downside is that if you fail to keep up with repayments, your property is at risk. Most lenders aren't in a hurry to sell your asset, as they'd rather you found ways to keep up your repayments. However, they have that option if they need it.Applying for a loan will usually require you to provide considerable information about the financial position of your business, along with projections about future income and cash flow.

Unsecured loans

An unsecured loan is where you borrow without providing an asset as security. However, most banks and other financial institutions do ask for a director's guarantee or equivalent. This is where the director agrees to take personal responsibility for repaying the loan, should the business be unable to do so.Because it's not linked to an asset, an unsecured loan can be set up more quickly. However, for the same reason the amount you can borrow is likely to be lower, and the terms less favourable.These loans can come in various forms, including business credit cards, which are effectively an indefinite loan where you choose how much you want to borrow and repay on a monthly basis, subject to certain limits.

Venture capital and angel investors

Venture capitalists and angel investors are individuals or groups seeking to put money into businesses with growth potential. Venture capitalists are investing funds on behalf of a third-party and as such, they are more risk averse. They're looking for evidence that the business has a promising future. An angel investor, or business angel, is a high-net-worth individual who is often more open to getting involved with a startup and will take a bigger risk.The money they give you is not a loan. They are effectively buying part of the business -  they have a stake in the equity of your business, meaning they become co-owners. This can have some implications for the amount of control that you have over how you run the business, but  can be beneficial, giving you a source of advice and support, and it can provide a strong incentive for you to be more successful.Both VCs and angel investors will make a careful assessment of your business and its potential, and they know that by investing they are taking a risk. At some point they will want to be repaid - often when the business is sold.

Crowdfunding and peer-to-peer finance

The internet has made it much easier to connect people who want to invest, often small amounts, with businesses looking to raise working capital - the cash they need to operate and grow.Crowdfunding is where a business wants to raise money to launch a specific product. The business can be either a startup or an established firm. It launches a crowdfunding appeal to people likely to be interested in the product. The funders typically don't have a right to be repaid if the business or product fails, but if it all goes well, they get access to the product on preferential terms. Two of the most well-known crowdfunding platforms are Indiegogo and Kickstarter.Peer-to-peer finance matches people and businesses with money to lend with others looking to borrow. Top peer-to-peer sites include Zopa and Funding Circle.Any business looking to raise money through crowdfunding or peer-to-peer systems is usually required to undergo credit checks and other financial assessments, to ensure the risk to investors is minimised.

Finding the right way to fund your business

Finding the right way to fund the plans for your small business depends on many different factors, including how much you need to raise, when and how you'll be able to repay it, and your attitude towards giving up some ownership or control of the business. Potential lenders or investors will be interested in your business history, your credit rating and your growth potential. Each will have different attitudes to risk.

Small business funding with Qardus

We provide funds to small businesses with a proven track record that are looking to grow. Our finance is ethical and community based, providing funding from £50k to £200k with terms of between six and thirty-six months. Our funding process follows Islamic principles, meaning we don't charge interest and we don't work with industries considered harmful to society, such as alcohol, tobacco and gambling. The funding is Sharia-compliant, making it an attractive option for Muslim business owners, but we also fund others outside the Muslim community.We offer fast, flexible and affordable unsecured finance, firmly grounded in ethical principles.  

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