How to raise finance as a micro or small business

Although knowing the amount you need is always the starting point of a funding journey, with micro and small business owners, I often find we can get ahead of ourselves because we have the bigger vision of what we’re building in mind. I say ‘we’ because I have done this myself and I’ll share more on that experience.

It’s easily done – you get a rough figure in your head of what you think you’ll need, but it’s often based on the bigger vision. This is why it’s worth working through your plans with a trusted advisor, so they can help you dig down into what you really need now. You’ll be able to say with more certainty what you’ll use the money for in the short and long-term. That will put you in a better position to secure funding.

Usually, you only need enough money now to get to your next step. Of course you’ll have a plan for what comes after, but the risk is that if you borrow based on the bigger vision, you can overinvest at an early stage before you’ve gained traction with your product or service. That puts pressure on you and your business and starts to drive your decision-making.

While you’re working through this stage, draw on your resourcefulness. If you couldn’t secure funding for some of your purchases, how could you source them or finance them in other ways? For example, could you lease instead of buying? Could you swap resources with another business owner? Would friends and family be able to help you out? Which of those options could you do anyway, and borrow or ask for less?

Many businesses start from ‘bootstrapping’ – pulling themselves up by their bootlaces – and are all the stronger for the experience of needing to be resilient and resourceful.

You could also try to negotiate better payment terms for your business, for example by securing a 30-day payment term rather than upfront payment. Just be sure not to overextend yourself on this.

As a micro or small business, you also need to be conscious of the credit terms you extend to other businesses, particularly large organisations that might have many layers of supply chain before you get paid.

In my own business, we were excited to have secured work with Carillion – a large multinational construction and facilities management company. We did well in the beginning to negotiate upfront payment. However, for the next contract, we extended our payment terms and it then took 120 days for us to be paid. Carillion collapsed in 2018, sadly leaving many suppliers in difficulty. It was a useful lesson for us that I frequently share with the businesses I work with.

Once you have an idea what amount you want to raise and what it will be used for, the next step is to look at your financial information in detail.

Any lender or investor will want to see your cashflow and budget forecasts as part of their due diligence. You therefore want to ensure it is presentable and that you can show the impact of the money on your forecasts.

You’ll likely have started this while working out how much money you need, and it is worth running a couple of scenarios with your figures.

At the minimum, have a version that shows what you would expect if you didn’t secure finance, and what you would expect if you secured the amount you are requesting.  

Ensure you show how many more sales you would make with the investment in place. You’d include your repayments with interest if you get a loan. Remember to add a percentage uplift in costs and your prices for inflation for future years.

You can also do optimistic and pessimistic forecasts. What would happen if you made 25% fewer sales than you expected? What would happen if costs went up by 25%? What if both happened at the same time?

Although it can be challenging to do this work, the investment is worth it. You’ll feel so much more confident knowing you’re prepared, and it will give potential investors confidence in you too.

One of the biggest barriers to funding I see when working with micro and small businesses is an awareness and confidence gap. If you don’t know what’s out there for you and have the belief to go after it, then you simply won’t try.

It can be overwhelming because the finance and funding space is full of jargon. But don’t let the jargon put you off. Be reassured that most people feel the same way, and it isn’t a reflection on you. It’s our job as advisors to help you understand the range of options available and support you to choose what is right for your business.

I have a fair amount of experience with different types of funding for the businesses I have run in the past, and soon realised the power of using other people’s money to grow your business.

Your background and beliefs come in and many people have been brought up with strong messages about debt finance, for example. But it is worth taking some time to learn more about different types of finance and funding, so you can weigh up the risks and benefits for yourself.

For example, while debt can help you grow your business more quickly than you otherwise could, the risk is that you can become ‘overleveraged’ – where the amount of borrowing in your business starts to exceed what you can pay back.

I had my own experience of this in my business, and felt like I was chasing my tail every month to ensure that I made payroll while also paying back debt repayments. However, even though this was challenging, I wouldn’t have been able to scale the business without the loan. That’s why it’s so important that you know what you really need, what it will be used for, and that you don’t borrow more than you need.

It can be invaluable to tap into the support that is available from business funding advisors, and networking with other business owners who have been through the funding process. You don’t have to go through the journey alone, and you’ll learn so much from their experiences and encouragement.

The uncertainty and imposter syndrome that comes up for many business owners when stepping into the world of raising capital is so common. When you’re working through the process on your own, it’s natural to feel alienated by the unfamiliar terms and feeling like raising finance is only for big businesses. But you are not alone.

There are lots of stories about massive fundraises, but every day we help micro and small businesses to secure funding to help them grow.

Some are a natural fit for equity, where an investor buys shares in your business. These are usually businesses doing something that is new, such as a tech or life sciences business. They are considered high risk – but they can scale quickly, so the potential rewards are also high. They have little chance of securing a loan due to the risk level, so equity is their only option.

We also see more traditional types of businesses securing finance, for example manufacturers. They are naturally more attractive to lenders because although there is less potential for scale, they are lower risk.

There is a large range of options available, and working with an advisor can help you quickly assess what will work best for your business. If this sounds good, find out more about UMi's Get Funding service, and get in touch with the team to have a chat.