Creative businesses have plenty of options when it comes to funding – it doesn’t just have to be about banks and investors these days.

Having started my own business, I’m genuinely fascinated by the stories of entrepreneurs and how they get off the ground. One topic that comes up time and time again is funding – where do they find that vital initial injection of capital?

For example, Richard Branson always tells the story of how his first business – a student magazine – got a cash injection from his mother who sold a necklace she found lying in the street after nobody came forward to claim it.

These days, more realistic options include selling subscriptions – a tried and tested method for traditional media which can also work well for video games and apps – and finding outside investors and distributors, which is common in film, television and big-budget game production.

With all that in mind, what are some of the pros and cons of the various funding options for creative businesses?

The traditional route: bank loans

For a long time, if you wanted to start a business or deliver a major creative project such as a feature film, your first stop would probably be the bank, followed by a search for investors.

The recent Small Business Finance Markets Report from the British Business Bank suggested that demand for bank loans from SMEs has been going down in recent years.

Its figures show that only around 8% of smaller businesses use a bank loan or commercial mortgage, compared to 10% in 2012.That’s partly because people think when they apply for a loan, they’ll be turned down.

It’s true that since the 2008 financial crisis, banks have become more cautious. The House of Commons Finance Committee held an inquiry into SME funding in 2018 and concluded that the level of lending hadn’t recovered to pre-crisis levels.

It found that very small businesses, or micro entities, were having an especially tough time getting funding.

I’m not a financial adviser so this is just my opinion – and don’t make any big decisions based on my opinion – but the pros and cons seem fairly obvious:

  • Pro – banks are stable and steady and if they won’t lend to you, it probably means your business plan needs work.
  • Con – they can be impersonal and demanding, and loans can feel relatively expensive compared to other forms of funding.

The other traditional option: investors

About 1% of companies use investment from ‘business angels’ and similar external investors, according to recent figures from the SME Finance Monitor.

Loans from directors, family and friends are slightly more common, having been used by about 3% of SMEs.

For creative businesses, convincing external investors can be harder work than if you’re setting up, say, a construction business, or a drinks brand.

If you’ve got an innovative business model, perhaps based around new technology, or you’ve already developed a strong brand under your own steam, outside investors might be more likely to take an interest.

Don’t rely on government grants

Earlier this year, Patricia van den Akker, director of the Design Trust, published a blunt opinion piece on the myth of government funding:

“There is no magical pot of money – just for you! And no, the recession or Brexit has nothing to do with that … there hasn’t been any money like that for a long time!

“There have only been a few organisations that provide funding for creative business startups in the last couple of years – The Prince’s Trust is one of the better-known ones, and that is for very disadvantaged young people.”

I think this is something most savvy owner-operators of creative businesses already know, to be honest, but it’s worth underlining.

At the same time, it’s also worth pointing out that Lancashire County Council’s Creative Lancashire service, which is based here in Preston, maintains a list of possible sources of funding.

It includes things like the Northern Powerhouse Investment Fund, which works with businesses across the North of England, and the Access to Finance scheme focused on SMEs in Greater Manchester.

From Creative England there’s also the Creative Growth Finance Debt Fund which provides scale-up loans to creative businesses in the UK. It offers loans of between £100,000 and £500,000 to creative firms that show potential for growth, especially where they’re involved in new technologies, are “talent-led” and innovative.

It’s always worth investigating these things and, if initial conversations suggest you might have a case for eligibility, putting in a bid.

The power of the crowd

Crowdfunding has had a lot of buzz around it in recent years with the public enjoying the opportunity to back interesting projects, and businesses appreciated a new channel of funding.

In the UK, though, only certain crowdfunding activities are regulated by the Financial Conduct Authority (FCA): peer-to-peer lending and investment-based crowdfunding.

The good news is that crowdfunding does generally seem to be a good fit for creative businesses.

For one thing, they’re better placed than most to put together the kind of engaging, eye-catching pitch that will get potential citizen investors excited.

Hard work, low risk

Finally, there’s self-funding, also known as ‘bootstrapping’ by people who like using jargon more than I do.

This approach requires total control of your cashflow and a commitment to reinvesting in the business until you’ve got it established.

It means questioning every bit of expenditure, driving hard bargains with suppliers, and careful budgeting.

This can work well for certain types of creative businesses, such as graphic designers or photographic agencies, with the option to operate out of an office at home or working primarily on client premises.

It can be hard work and a bit more stressful but at least you’re independent. Also, businesses that start this way tend to be pretty lean and efficient from the off.

Talk to us for advice on helping your creative business grow.