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Small business funding – what are the main sources of finance?

October 8, 2011

Most small businesses will, at some stage, seek funding or investment – for growth, starting up, or to see them through a transitional period (or a downturn). In this article, we look at the main sources of funding that are available.

Personal Sources

A large number of start-ups are ‘self funded’ – either via savings, loans from family and friends, or via existing sources of personal borrowings. Sometimes it can be difficult to raise funds from other sources if your business plan or case is not easily understood by third parties, so personal funding is often the only realistic source of initial funds.

Banks and Finance Companies

By far the most common source of funding comes from high street banks – in the form of loans, overdrafts, and other types of finance.

Banks, and more specialised finance companies also offer more ‘alternative’ sources of credit, such as factoring and invoice finance (which free up the value of your invoices, for a fee). More and more small businesses have turned to invoice finance companies as a means of freeing up cashflow during the downturn.

Business Angels / Investors

If you would like to bring in funding from an outside investor, you will typically seek out business angels who look for interesting projects to invest in, and make money from. These are usually wealthy individuals, who have previously sold a successful business.

You may also be aware of venture capitalists – typically companies who specialist in investing larger sums of cash into business ventures.

Unlike banks, outside investors will provide funds in return for a share in the business. They may also provide expertise to your business, which can prove as valuable as a cash injection in some cases.

Other Sources

Other sources of funding include grants (both Government and private sector) – there are thousands of grants available depending on your industry and location. You can find out which grants are available at sites like Grantsnet and j4b.