Routes to Securing Small Business Investors
Small business investors being sought to accelerate the growth of the 5.7 million business in the UK. Approximately 99.9% of these are SMEs (Small Medium Enterprise) and they are classed as having between 0 and 250 employees. An astonishing 96% of these are in the micro-business bracket, employing less than 9 people .
Thousands of new businesses register every year in the UK, and a high proportion, approximately 1 in 3, located in London and the South West. Not surprisingly, the highest number are in the capital city, but other regions are leading the race in growth of startups. The West Midlands is the fastest growing by 9% and possibly because more people are running businesses from their homes . With the information superhighway, commuting to an office is no longer deemed necessary but it still takes capital to launch into a marketplace. Aside from keeping overheads down, funding is a necessary part of promoting a new business and getting noticed.
Also, current SMEs need to grow. Warnings of global warming are having an effect on production and transportation, and running costs are always rising. A stagnating business folds so funds increase marketing and improve sales through promotion.
As a result, both new and old businesses are looking for fundraising.
In general, financing come from 4 avenues:
- Asset based
- Small Business Investors
Unfortunately, banks see lending money to small businesses as very risky. In 2017, big banks refused 75% of funding requests . Mainly because SME profit revenue is smaller than big businesses and many SME repayments defaulted. When banks do agree on funding, whether by overdraft, loans or credit, they charge high rates of interest. A business plan is a must to apply for bank financing. Seemingly a good way to access money, unfortunately a bank debt is a debt that needs repaying quickly and can be a heavy price to pay.
Funding sources of grants come from governments or private organisations. These, like a bank, require a business plan but have a lot more hoops to jump through to obtain. You have to fit your idea to what is on offer, which can make you lose some of your zest. Generally, the criteria are supporting the national economy, developing new technologies or helping minorities.
Seen as a more secure way to give a financial loan to a small business, a bit like remortgaging your house. Asset based lending applies more to companies already set up and who have stock they can use as collateral. Such as buildings, vehicles and machinery. This makes a less risky investment because, if repayments are not met, there is something to sell to get the money back.
Small Business Investors
These can be friends or family, venture capital, crowdfunding or private.
- Friends and family are a good start to ask for funding. Generally, they will be more trusting of you and eager to support your venture. A good source of financial donors though often with money limitations.
- Venture capitalists are a much bigger source of financing. These are professional investors who often require a more hands on approach to your business. Which can feel like they are taking over your idea and forcing you to take a back seat.
- Crowdfunding is a new way for businesses to secure funds. Building up your pot by making use of social networks and the media to access many small investors. Your customers and the general public can invest in exchange for equity in your company. This keeps you more in control of how much involvement they can have. Entails a lot of planning before beginning a campaign and brokers can help put your package together for a commission.
- Private investors are the best kind for small business cornerstone investments. Though getting access to them takes a lot of hard work. They can be very slippery and take a lot to convince that you have have that special something. Be prepared for a lot of rebuffs as you will need to approach about 50 before one takes the bait.
A good way to access private investors is using an investor database. With the financial uncertainty of the UK leaving the European Community, however, seeking investors abroad might be a risky business so make sure to put your bet on UK citizens.
So how can we help?
At Drop Studio, we provide you with all the tools to find, connect and reach out to potential investors with our Investor Accelerator. With expert advice and guidance, we’ll help you discover potential investors by the likes of supporting you on your campaign strategy and mapping out your investor network etc.
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