5 Types of Investments That Will Help Fund Your SME

Entering a flash recession, with signals the UK economy is already on the recovery following the financial difficulties of the coronavirus pandemic, there’s never been a more important time to secure additional investment for SMEs to help continue growth for their business.

Understanding how your business is growing and will develop in the next steps of your business strategy is essential as we navigate this ongoing period of uncertainty. Furthermore, recognising which investment fund is the best option for your business needs clarity.

Here, we look at five different types of investment and how they can fit into your business model, with positives and negatives.

1) Bootstrapping

The best investment is self-investment. Bootstrapping is the act of using personal finances or operating revenue to start or grow a business. In this situation, business owners with little capital invest their own money rather than relying on outside investment that could dilute their shares in the company.

The benefits of this technique include maintaining control and shares in your company. When using your money, you own the risk of failure - but you also own the opportunity of string returns and increased profitability. Equally, there are disadvantages to bootstrapping. Your personal finances can be strained by this method and you may not be able to raise as much capital as you would from other sources of investment.

This investment strategy does have one overwhelming advantage - after the initial personal investment, future external investments can still be considered. Maintaining control while growing your SME means that the ability to take on investors in the future is less constrained by input from other people.

2) Friends and family

There’s another way to raise capital for your SME growth without venturing too far from home. If it is available, using investments from family or friends can help to kickstart your growth.

As a positive, this is one of the easiest ways to secure money for your SME. Even more, by giving shares in your company to family members in return for capital, you can rely on them as trusted advisors with motivation to see your business grow. Like bootstrapping, it also opens opportunities for future external investments as ownership of your business is localised, but additionally proven to be worth investment by other people.

Friends and family invest more in startups and small businesses than any other type of investor, with $60bn (£46.2bn) ventured every year, making up 38% of all investments.

There is one essential downside to this method, and it comes with failure. If your family or friends’ investment is not returned and your business growth strategy does not work, these close relationships can be strained irreparably. This emphasises the importance of formality in investment - propose your plan and be upfront to any investor about your plans and potential risks. A thorough plan is the most investable.

3) Small business loans

SMEs are at the heart of the UK economy. In 2019, SMEs accounted for 99.9% of the UK business population, according to official government reports. The government encourages the growth of small businesses, with the UK placed within the top 10 countries globally to start an enterprise. For this reason, the UK government has published a list of government-backed support and finance for growing businesses. The list is refinable to meet your needs, including your current business size, how many employers you have, which sector and industry you belong to, and optimised for regional investment - putting you in the vicinity of the best investors.

One major benefit of a small business loan is that the investment does not take shares in the company and they do not have any say in how the loan is spent in your business. However, with loans, the financial risk is largely your own. Loans must be paid off, even if your growth strategy does not succeed, putting further financial constraints on your business.

4) Private investors

When utilising equity investments, it important to understand what your SME can get out of the arrangement. Investors usually give out high capital but expect high returns when your business grows. It should be noted that investors are in your business for the long run, and they are motivated to see your business grow for their personal profit. There are two main types of investors who may be interested in your growing SME.

Angel investors

Usually approaching businesses while they are starting, angel investors offer more than capital for businesses. Angel investors often have a support network of other businesses that can help your company to grow, with insight into the best approaches to grow and develop your platform.

Some angel investors specialise in particular sectors and industry, using knowledge and experience to help you with your business. However, the investment is not dedicated, with investor portfolios meaning that their attention is often diluted between different organisations.

Venture capitalists

Venture capitalists invest in companies that demonstrate growth potential in return for an equity stake in business. These investors are essential to SMEs who do not have access to equity markets to raise capital for their business. Usually targeting companies on the brink of commercialisation, venture capitalists can provide helpful insight to business strategies while building a network for your organisation. There is no obligation for repayment.

There are negatives - if your business is not ready to grow, you may risk failure. Investors also hold stakes in your company, meaning that it is more difficult to offer future shareholders.

5) Crowdfunding

Crowdfunding is a relatively new concept in the world of investment, starting in Britain in 1997 as a way for musicians to tour through donations from fans. Today, crowdfunding is an essential investment for many startup businesses and growing SMEs. In fact, the global crowdfunding market is expected to grow to $300bn (£230bn) by 2030.

Crowdfunding works by having people interested in your company’s product or service make donations to a campaign that, if successfully raising a target amount, will expect a small favour in return for their support. These favours can be differentiated by the size of the donation and are often made explicit in the campaign.

For example, if you were to create a campaign focussed on the development of a new product, a large donation may be considered as a pre-order for when the product has been made, a small donation may allow donators to receive a discount or exclusive early access to the product. The most creative campaigns are often the most successful.

The benefits of crowdfunding campaigns include the increased focus and attention on your brand during the campaign, with donators often sharing information about your product to ensure more donations to meet the target. Like bootstrapping, the money is yours and uncontrolled without sharing equity. However, there is a high rate of failure for crowdfunding campaigns. Failed campaigns can also damage your company’s reputation.

Whichever route you take you must make sure that you are ready for a level of due diligence from the funder. At the very least, you will need to have audited accounts ready, forecasts, and a story that excites any potential investor.

When searching for investment, clarity is key. You must understand your strategy and the potential failings of your plan before you receive internal or external investment. After all, thorough planning is the best way to avoid any risk. Before seeking investment, ensure that you recognise every aspect of your business and understand which aspects are most likely to ensure your success in the future. This way, investment will be the best way to create success for your business.

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Wisteria is an independent firm of Chartered Tax Advisers, Accountants and Auditors based in North West London.

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    Barnet, UK
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    Andrew Millet
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