Written by James Ross, Facilitator for North Chilterns & Oxford
A question I get asked all the time is: "What is the best way to raise finance as an SME?" It seems that the area most business owners know and think of first is finding a strategic investor and raising money by giving away equity in the company.
Invariably, this is a bad idea for the following reasons:
Loss of control: You are no longer the sole decision maker, and you have other people to agree with strategic decisions.
Unfavourable Valuation: More often than not, giving away equity at an earlier stage of your journey means you are giving away far more of the company as you are getting investors in early.
Long-term commitment: Once you have an equity partner, you have them for life (unless you buy them out later, which can be very costly).
*The main exception is if the investor can open doors or propel the company forward that you as an owner cannot, in which case it may be a good strategic option.
So, if raising equity is generally a bad idea, how can I raise finance?
Debt Financing
The best way to raise finance is through fixed-term debt, as the interest is often not material (and tax-deductible), and you are still fully in control of the company.
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Director Loan: Either using personal funds or if the business is less than two years old, you can get a government-backed Director loan for £25k per Director at 6%.
Friends and Family: Friends and family can be a great source of finance. You can offer them a commercial rate of interest that they would not get from a Bank, and you can parcel it up into smaller loan amounts, which can quickly add up to meaningful finance. Structure the loan for 2 - 5 years with a no-penalty early repayment clause if you want to pay it back early.
Strategic Loan Partner: Many companies have trapped liquidity that they don't want to release for tax reasons. If you perform a circle of influence exercise across business owners, you know and ask around if anyone is looking for a business-to-business loan at commercial rates of interest.
Other forms of Finance
Grants: You may be eligible for rural grants or innovation grants; however, be prepared for plenty of red tape.
Joint Ventures and Partnerships: Form strategic partnerships or joint ventures with complementary businesses to access additional resources, expertise, and financing opportunities.
Invoice Financing and Factoring: Use invoice financing or factoring to improve cash flow by selling accounts receivable to a third party at a discount. This provides immediate access to funds tied up in unpaid invoices.
(Author admission: I am not a huge fan of this idea, but it is still better than giving away equity.)
In conclusion, there are many more ways to raise finance as an SME owner than you may initially think, and this money can make a huge difference to your company if spent wisely. My advice is always to consider your options before giving away that precious equity in your company!
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