Creative ways that small businesses can help raise finances

by Neil Horton


In these credit-crunching times, raising financial backing has become harder than ever. For small businesses, this recent squeeze has hit hard as banks tighten up their risk profiles. New capital is, of course, the lifeblood of any business, and particularly, for ones that want to expand. With this setting as a backdrop, consider the following:

Employee buy-ins

Even if you only employ a small number of people, buy-ins should not be ruled out as they deliver multiple benefits. Employees relinquish a portion of their pay in return for equity or profit sharing in the business. Benefits include reduced labour costs, employee retention, increased morale, accountability and maintaining corporate control. For proof as to how scalable and successful buy-ins can be, just look at John Lewis Partnership from the United Kingdom – £6.9 billion turnover with 69,000 employees involved! And to think, these people started out with a corner shop.

Consider changing your legal form

Depending on where you sit in the small company hierarchy, adapting your legal shape can present several opportunities. If you’re a sole trader, consider becoming a partnership – this way you can bring in fresh blood, new ideas and, most important, new capital. If you are a partnership, consider incorporating, converting partnership equity to stock, charging a premium for the conversion and inviting new shareholders to join at the same time. Poll your close networks for potential subscribers, perhaps inviting family members or private investors to become equity holders.

Equity-raising opportunities

Many see this option as full market flotation and so shy away due to dissolution of ownership; though there are other methods which should not be ruled out. For example, Business Angels—these are private individuals willing to invest in businesses monetarily and intellectually. Sums of money from these individuals can range from a few thousand to many thousand dollars. Angels are more likely to consider small-scale businesses, with their input normally coming with the proviso of profit or equity share. Venture capital is another option to consider; again, this is private capital and is more likely to be obtained by small, high-potential, high-growth businesses. Venture capitalists will normally invest for an equity share.

Approaching the bank for a loan

Always have a business plan prepared when you approach your bank—this goes for a first-time request as well as a refinancing proposal. Bankers thrive on detail and will look for coherence, risk appraisal and, above all, viability. More than ever before, you will need a copper-bottom representation of your needs and a reasoned forecast for your ability to repay with interest. Business plan formulation is an art form and I would seriously recommend the uninitiated to engage an accountant to help put one together. Investing some money on professional fees now will save you a lot of heartache further on down the road.

Squeeze working capital

Some businesses don’t always realize how much money is tied up on their balance sheet. Often a quick win for businesses to produce cash for reinvestment is to speed up their working capital cycle. Examples of this would be to reduce payment terms or speed collections along with invoice discounting—selling the debt to a third party and receiving the cash up front. You can also reduce stock levels or move to a ‘Just in time’/JIT system of procurement. Conversely, try and increase your payment times to suppliers; this can be achieved by smarter ordering and renegotiation of payment terms.

Become more profitable

By making more money, you will have more money to invest. You can achieve this in two direct ways. First, and most obviously, is to increase your selling price. To do this you need to establish what sensitivity there is to your pricing and test it. Alternatively, try to strip out costs—direct and indirect. You may look to renegotiate prices with your suppliers or look for cheaper ways of doing business. Outsourcing is another option, or look for cheaper premises, maybe moving to an entirely virtual business if you are service based. Lots of business owners, such as real estate agents, have now moved entirely online, simply renting a small office space for holding staff and client meetings. This concept is scalable and transferable to many other businesses.

The opportunities considered here are some of many available to small businesses. In this challenging commercial environment, it pays to be flexible and open to new ideas. Whatever approach you take, consider the outcome in the round, weighing up the risks and benefits thoroughly before moving forward with your decision. As any small business owner knows, your success will come through your ability to innovate.


Neil Horton is the Director of Business with Interlinkdirectory a human edited business Internet directory with a focus on quality and global reach. Neil has a business and finance background and has worked in the commercial sector for 15 years. He began his career with small, owner-managed businesses, progressing through to global corporations and, ultimately, to running his own company.

By Adam

March 04, 2010