Home » What are The Barriers to Funding For Small Businesses?
Getting investments is one of the biggest challenges small businesses face when getting started. Finding external finance takes time and effort. Despite the huge range of funding options available, getting funding can still be a huge barrier.
According to a study by the Federal Reserve Bank of New York, small business owners are more likely to be denied credit than larger businesses. In fact, small businesses are twice as likely to have their loan applications denied by large banks. Speaking to some industry experts, this article details the unique barriers to funding faced by small businesses.
Lack of Detailed Planning
“Many small business owners launch into the process of seeking funding without first spending enough time and energy on planning,” explains Richard Allan of funding platform, Capital Bean.
“This could be due to a lack of experience or a limited understanding. However, it can be a huge barrier between you and your investment, grant, or loan.”
“Investors will want to see evidence that you understand the market and have a solid plan for the future of your business. They want to see that you have done your research and spent time making a detailed plan.”
“A well-thought-out business plan will be a huge asset when it comes to securing funding for your small business. Make sure to describe your core business objectives as well as plans for how you intend to achieve them, whether you need money immediately or for the long-term. Include marketing plans and financial forecasts since this helps investors and bank managers understand how you will grow your business.”
Many businesses gain funding through crowdfunding or preorders. This option may not be available to new businesses who lack the exposure, customer base or social media following to launch a successful crowdfunding or pre-order campaign.
Lack of Contacts
“Start-up founders often lack a large pool of contacts,” explains Richard Dent, founder of business finance provider.
“This can make it difficult to hear about opportunities and competitions that might provide the necessary funding. It also means that they are less likely to be put in contact with investors who might be very interested in funding a business like theirs.”
“Networking will help small businesses to raise finance, both short-term cash advances or long term funding. It is a vital part of building a business, and can mean the difference between receiving a personal introduction to an investor as opposed to approaching them cold.”
“You can join business groups to meet other entrepreneurs, or find small business events in your area or online. Each person you meet will have their own network of people they might be willing to introduce you to.”
“These groups will also be able to help you tackle any challenges you have been facing, giving you advice or supportive anecdotes from their own experiences. If you are part of a minority, you may be able to find a group that specializes in helping your community.”
A recent report found that getting funding can be especially difficult for BAME individuals. The report shows that although ethnic minority entrepreneurs invest more time and money in new businesses and have a higher education level on average, their businesses have a lower success rate than their White British counterparts.
Under-representation of certain ethnic groups among managers, directors, and officials can reduce the level of networking and funding opportunities for new BAME entrepreneurs. Access to funding has been stated as the reason why 39% of Black entrepreneurs and 49% of Asian entrepreneurs give up on their businesses.
Choice of Funding
There are a huge number of decisions when it comes to finding funding. This can be overwhelming to new entrepreneurs, especially ones who lack a network who can advise them. Many entrepreneurs are unsure exactly which form of funding would be appropriate for their business, and many end up giving up and trying to fund their business by themselves.