Back in August we had a look at the Global Entrepreneurship Monitor (GEM) research which tracks entrepreneurship across Europe. One of the findings from the GEM research was that there was a mismatch between where people planning a new business thought they would get their funding from and where they actually sourced funding.
The University of Surrey have done a new study on SMEs in conjunction with the accountancy firm Kingston Smith. As part of this research they looked at where start-ups got their funding from and how sources of funding changed as businesses grew.
In the GEM research 47% of people in the pre-start-up phase expected to fund their venture themselves. The University of Surrey research has found an even higher figure with 72% of people funding start-ups out of their own pockets. The University of Surrey report suggests that this is partly down to a scarcity of funding and partly down to mistrust of the banks. The report found attitudes towards the banks from small businesses “ranges from disappointment to contempt”. Small businesses are therefore actively trying to avoid engaging with the banks.
However, the University of Surrey report did find that the banks still have a role in start-up funding with 28.2% of businesses receiving funding through bank loans. It is important not to see start-up funding as an either/or choice. While 57% of start-ups reported having raised their finance through a single source, 24% had two sources of funding and 11% had three sources of funding. So what we begin to see is a picture of start-ups using their own money to found their business but supplementing this with a bank loan, angel investors, credit cards or other kinds of financing.
The University of Surrey research didn’t just ask businesses where they got their funding from during their start-up phase but also where it was coming from once they were established. They found that nearly 70% of SMEs were bootstrapping their businesses. That is that they were growing their businesses through re-investing profits. However as with the start-up funding many were supplementing this through loans, invoice factoring and income from other activities. As these businesses grew the report found they became more likely to start accessing traditional bank funding. In part this could be down to them having exhausted other sources of capital but also because the banks tend to be more willing to lend to established businesses. As with start-ups growing businesses do not tend to rely on single sources of funding, indeed they tend to diversify more as they grow with 32.9% of growing businesses having 3 or more sources of funding compared to 17.8% of start-ups.
So whether you are in the planning phases of a start-up business or are trying to grow one into an established SME it is important not to focus too heavily on the success or failure of a particular funding type. Successful businesses tend to be getting funding from a range of sources and to diversify these sources as they grow.