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Small businesses can raise capital through either debt or equity financing.
Incredibly, the 5.5 million small businesses in operation at the beginning of 2021 comprised 99.2% of the total business population in the UK, while also accounting for three-fifths of total private sector employment.
What’s more, small and medium-sized ventures account for half of the turnover in the private sector, making them part of a key economic engine.
However, it can be incredibly hard for small businesses to raise capital. Here are some options to consider at different stages of your venture.
It can be hard to secure bank loans or venture capital at a pre-revenue stage, while entrepreneurs will also be precluded from leveraging invoice financing. So, most startups have to consider bootstrapping their business and funding it themselves or at least borrow capital from their friends and family. Crowdfunding may be an option at this stage, although you will have to consider giving up equity or free products in exchange for this.
Once your business has evolved and started to generate revenue, this capital can be leveraged to drive growth. Invoice financing can be utilised here, as you sell your accounts receivable to a third party and optimise real-time cash flows before settling this debt when clients pay their invoices. Of course, the profit generated through trading can also be reinvested directly into the business, depending on your future growth plans and your company’s margins.
After a period of time, your business will hopefully build a track record of increased revenue and profitability. This ensures that your company will be attractive to lenders and venture capitalists, who may ask you to provide collateral or sell equity in the business in exchange for the cash. These factors (along with the potential interest repayments) make for key considerations, and you’ll need to balance your need for cash against the long-term impact on the business.
Lastly, mature and high value businesses can potentially float on the stock market and create an initial public offering. This will raise capital from the sale of shares on the open market, although structuring this will require help from capital market lawyers. Similarly, you could target a potential merger or acquisition as part of your long-term exit strategy, where you look to sell the business for a significant sum of money to a more established market competitor.
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