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Know your numbers

How to finance your business, from loans to crowdfunding.

Revenue represents all positive cash flow earned by a business. It’s the money generated from normal business operations, calculated as the average sales price multiplied by the number of units sold. It is the top line (or gross income), and is also known as sales on the income statement.

Cash flow is the amount of money coming in and out of your business. It's how much ready cash you have on hand. Cash flow is one of the key indicators of how well your business is doing and your business profitability.

Profit describes the financial benefit realised when revenue generated from a business activity exceeds the expenses, costs, and taxes involved in the business.

Going over the important terms

Know your numbers. People go into business and think that by getting an accountant they won’t have to pay any attention to the money. But whether you are using an accountant, accounting software or spreadsheets, when you get your numbers at the end of the month, it means nothing if you don’t understand them.

Jay Maniar, finance and operations support for startups, PVTOL

Cash flow is a common barrier for new business owners

In a survey conducted by Small Business Britain, 52 per cent of small businesses reported to have been dealing with challenges. Considering there are around 5.5m small businesses (with 0-49 employees each) in the UK, that is a huge number – but it’s not surprising.

Given the current economic climate, how much money do you need to grow a successful business? How can you raise that money?

The amount of money you need for your business depends on your industry and personal circumstances.

Do you sell physical products or are you a service based business?

Will you need a storefront, or a well-designed website?

Do you need to work out shipping logistics, or do you need to build a team?

How much money do you think someone needs to start a business these days?

£1,000
£5,000
£10,000
Over £10,000

How can you raise capital for your business?

When it comes to raising/securing money for your business, whether it is to fund a new product or take on additional members of your team, you can go through different routes.

A few popular examples are:

Personal savings
Crowdfunding
Business loans

In this section, we'll look through the advantages and disadvantages of each funding option.

How familiar are you with different funding options?

Very familiar
Some basic knowledge
Not familiar at all

The cons of using personal savings to fund your business

Limited resources: Using personal savings to finance a business can limit the amount of capital available.
This has been exacerbated with the cost of living crisis, which has made saving any money very challenging. Limited capital can also hurt areas of the business which need money to thrive. Having said that, raising a sizable amount of money isn’t impossible – it just takes time and personal sacrifice.
Lack of experienced support: By not having an investor or financial partner as a new or small business owner, you may not have access to professional advice and support from experienced investors or mentors.

Personal savings

Personal savings are an important source of financing for many entrepreneurs who are just starting out.

Using your own money to finance the growth business can be a great way to jumpstart operations without having to rely on outside investors or lenders.

There are several advantages as well as disadvantages that come along with using personal savings to finance a business. Let’s explore a few.

The pros of using personal savings to fund your business

Freedom: As it’s your money, you can use it as you please. You can also adjust your strategy as needed without having to worry about terms and conditions laid out by investors.
Control: If you’ve ever watched Dragons' Den, then you’d know that sometimes relying on an investor means giving up some control of your business. However, with your own money, you have full control of your business.
Low cost: Financing your business with your own money means there is no interest to pay. This is great for young businesses that are working on a tight budget and need to keep costs as low as possible in order to survive the early stages.

Crowdfunding or community support

Crowdfunding is the practice of raising money from many people by pitching your business on a platform, and is becoming increasingly easier and popular.

There are three main types of crowdfunding:

Reward-based crowdfunding: Individuals contribute to a project or business in return for a reward (such as a free product), e.g. Kickstarter or Indiegogo.
Equity-based crowdfunding: When so-called retail investors come together to invest for an equity stake in the business, e.g. Crowdcube or Seedrs.
Peer-to-peer lending: When lenders and borrowers are matched through an online service, e.g. LendingClub or Funding Circle.

The pros of using crowdfunding to finance your business

Lower risk: There are no upfront fees involved, and relatively small final fees, with some crowdfunding approaches because the money is being gifted or invested by individuals rather than borrowed from a creditor, there is no interest to pay back.
Free promotion: Pitching your idea on a platform is a way of marketing your business, which will bring extra eyes to your product. In addition, if donors love your idea, they can promote it on your behalf.

The cons of using crowdfunding to finance your business

Laborious: It takes a lot of work to pitch your business. You need to know what you’re doing if you want donors to take you seriously.
Possible reputation damage: Failed projects risk damage to the reputation of your business. You may also need to pay all the money you’ve raised back if you fail to reach your target.
Costly: Offering rewards in return for money can lead to you giving away too much.

Taking out a business loan

A business loan is money lent to a business owner, typically by a bank or another lender. The money issued is exclusively for use in their business and is repaid over time with interest.

According to the British Business Bank, there are two types of business loans. The first is a secured business loan, where you use assets (property, equipment, stock and shares) from your business as security in case you’re unable to pay it back.

The second type is an unsecured business loan, where you don’t put up any assets. With this arrangement, you may have to sign an agreement stating you’d be able to pay back the loan personally if the business can’t. Also, the interest rate may be a little higher.

The pros of using a business loan to finance your business

Control: Unlike other forms of financing, a small business loan enables you to enjoy an injection of cash into the business without surrendering any control.
Security: Taking out a small business loan with a well-known high street bank offers a high degree of security, thanks to the reputation of lenders who have been established for many decades.

The cons of using a business loan to finance your business

Eligibility: The eligibility criteria for taking out a small business loan are usually very strict.
Limited amount: In some cases, a lender may approve the loan but not for the full amount. They may decide that you don’t need the whole requested loan to deliver what you have in mind, or that it would be too risky to hand over all the money.
Time consuming: The application process for a small business loan can be incredibly time consuming. As well as filling in the relevant forms, you also have to provide a business plan, a full history of your accounts (if any) and financial forecasts to establish your business credibility.

Three things to remember:

Stay positive. There will be knockbacks, and you may have others questioning your idea. You need to remember that the success of a business depends on the unwavering belief of its leaders.
Your allies and supporters may not necessarily be who you expect. Be open and willing to look for help in unusual places.
People want to help you. Accept the help and advice, but be careful about being lectured on how your brand should be represented or who you should market to. Nobody will understand why you went into business in the first place more than you.

How do you plan on funding the growth of your business?

Personal savings
Crowdfunding or community support
Business loans
Another option