A guide to choosing between personal and business finance for your SME

Taking a business idea out of the realm of whimsy and making it a practical outfit for the long term can require significant financial outlay, whether on your part or someone else’s. According to research conducted by American Express and the Centre for Economics and Business Research, small and medium-sized enterprises yearly spend, on average, £1,016,194 on keeping themselves running.

However, where is all of that money coming from? This subject wasn’t investigated in the research reported by smallbusiness.co.uk, but if you are running an SME yourself, the funding options at your disposal could be separated into the distinct categories of “personal” and “business”.

With a little help from my friends… and family

If you pull out your pockets in the style of a cartoon character and find nothing in them except dust and dirt, the only palatable sources of personal funding might be your friends and relatives. This doesn’t necessarily bode poorly for several reasons that are largely because of sentiment.

For example, a family member may be willing to forgo demanding a dauntingly high rate of interest, being content to pour money into your business simply on account of its promising prospects. Still, a relative or friend could react angrily if your business falls and takes their money with it.

There must be an angel… investing in my company

Numerous businesses now established as big names in the twenty-first century – think Facebook and Uber – overcame early financing hurdles due to being beneficiaries of angel investing.  

An angel investor is, as This is MONEY.co.uk explains, someone who financially backs a little-established company provided that they receive an ownership stake in this business. Should the company thrive, both that and the investor will be financially boosted.

After recruiting an angel investor, you might find that their expertise in corporate matters does even more to take your company to the next level than any of their financial contributions manage. Still, as you will lose a chunk of your future earnings, tread carefully before choosing such an investor.

Consider an adventure with venture capital

Venture capital is somewhat akin to angel investing, but you shouldn’t overlook the key differences. While angel investors, in sourcing funding for a company, will dip into their own large pool of personal finance, a collective of wealthy private investors is usually behind an injection of VC money.

However, such investors will insist on essentially taking control of your business, leaving you to follow a VC-decided business plan. You might want to keep more control of your own destiny.

Could you go it alone with just a loan?

Given the drawbacks of the two other types of business finance we have mentioned so far in this article, could it be worth going down a more traditional route? To be more precise, should you visit your bank to ask for a loan? Yes, but whether you will get one is a different question.

According to an estimate by the British Business Bank, each year sees 100,000 small businesses leave banks empty-handed after having applied for a loan. Banks have become more risk-averse in the wake of the financial crisis, so you might have to rule out a loan if your business has esoteric aims.

You might be able to get by without a loan if you resort to bootstrapping, where you would learn to make the most of what little personal money you have. Clever cash-saving techniques upon which you could draw include sourcing insurance from such a broker as Be Wiser Business Insurance. This would be a quicker means of obtaining a good quote than approaching separate insurers one by one.