Finding funding is often one of the biggest challenges business owners face, but there are several ways to overcome the problem and secure investment in your new venture.
When you’re starting a new business, finding external finance can take a lot of time and effort. Despite there being many funding options available to business owners in the UK, it can still be hard to find the right one for your company.
Start-up founders often lack the necessary knowledge and contacts to find funding, and it’s particularly challenging for specific groups. Alone together: Entrepreneurship and diversity in the UK, a report by the British Business Bank on entrepreneurship and diversity, found access to finance is a barrier for ethnic minority entrepreneurs. It is the reason why 39% of Black entrepreneurs and 49% of Asian and other ethnic minority entrepreneurs stop working on their business idea.
The same study found that poorer business owners also struggle to fund their start-ups, while separate research showed that for every £1 of venture capital investment in the UK, all-female founder teams get less than 1p compared to 89p for all-male teams.
WHAT'S STOPPING ENTREPRENEURS FROM GETTING FUNDING?
Common funding barriers faced by entrepreneurs include the following:
Lack of planning
Many entrepreneurs embark on the process of seeking funding without detailed planning. This is often due to a lack of experience or limited understanding of financial forecasting. Before providing you with finance, investors will expect to see evidence that you understand how you’ll reach customers and make money.
Lack of customers and contacts
New entrepreneurs often lack the customer base, social media following and valuable contacts that more established business owners enjoy. As a result, launching a crowdfunding campaign or making connections with investors can be a challenge.
The Alone together report found that although ethnic minority entrepreneurs invest more time and money in new businesses and have a higher educational attainment level than those from a White British background, their businesses have a lower median turnover and a lower success rate.
The report attributed this to “access to finance, social capital, deprivation and household income, as well as the under-representation of certain ethnic groups among managers, directors and officials in the workplace, which reduces the opportunity to develop business-relevant skills, knowledge and networks”.
Choice of funding options
New entrepreneurs can often be overwhelmed by the number of funding sources available and are unsure which type of funding is appropriate for their business. As a result, many don’t apply and try to fund their business themselves.
OVERCOMING THESE BARRIERS TO FUNDING:
Here are five ways to deal with common funding challenges.
1. Write a business plan
A detailed and well-thought-out business plan will help you get funding. It should describe your core business objectives and outline how you plan to achieve them. A good plan will help you and other people, such as bank managers and investors, understand how you’ll generate money and achieve scale. It should include information about your goals, strategies, marketing plans and sales and financial forecasts.
2. Get out and network
Networking is a vital part of building a business, and it’s particularly useful when it comes to raising finance. Receiving a warm introduction to an investor from someone you’ve connected with can be far more beneficial than approaching them cold.
Join business groups to meet fellow entrepreneurs and find small business events to attend online and in person to build your network.
If you’re part of a group that faces particular challenges with access to finance, business groups and communities dedicated to those groups, such as ethnic minority or female enterprise networks, could be useful. The British Business Bank is focused on improving access to finance for underrepresented groups. One in five of its Start Up Loans go to people from ethnic minority backgrounds.
3. Build a strong support system
You should have supportive people around your business who can help you access finance. Mentors with experience in your sector can advise on appropriate finance methods and support you with your business plan and pitches to investors. They can also assist once you have the funding. A Start Up Loan comes with a mentor who can advise on using your loan and finding further funding.
External advisers, such as accountants, can also provide valuable financial guidance and, if you’re ready to recruit, look for people who might be able to help you when it comes to finance. Having team members with strong commercial awareness is useful when pitching to venture capitalists and angel investors.
4. Source the right funding
As well as providing you with the right amount of funding, you should look for an lender or investor that’s a good fit for your business, or enlist a broker who understands your sector and can select one for you. Many external finance providers specialise in particular types of business, sectors or regions. For example, some investors funds focus specifically on female founders or businesses with social or environmental aims. Targeting those might be more beneficial than trying to reach an extensive group of investors.
Speak to other entrepreneurs in your sector who’ve already raised finance and look for specialist online groups that allow you to connect with investors. You can also keep an eye on the press for news of funding or stories about investment firms backing companies in your sector.
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5. Build a buzz around your business
Generating interest in your business can help open up access to finance, particularly if you opt to use crowdfunding. Even before you’ve fully launched your product or service, you can use social media and other marketing methods to build a buzz. If you then launch a crowdfunding campaign, you’ll have a group of loyal followers ready to back you. A strong social media following that generates sales can also provide evidence to potential investors that you have a strong audience for what you’re offering.
Reference: British Business Bank. 2021. Record levels of smaller businesses sought external financial support in 2020, with further significant demand expected in 2021, finds British Business Bank research - British Business Bank. [online] Available at: https://www.startuploans.co.uk/business-advice/finance-barriers-for-small-businesses/