Funding is crucial to launching a successful venture, but on average women’s businesses start up with a third less capital than those of their male counterparts.

This lack of funding among women’s businesses is mirrored by low numbers of female investors. Less than 5% of UK business angels are female. More needs to be done to encourage women to explore this exciting and potentially lucrative form of investment.

So what are the funding options for both women (and men) needing start up or expansion capital? The first step for companies looking for financial backing is to work out what sources of funding are available. Depending on your size and structure these may include grants, loans, or for businesses with growth potential, business angels and venture capital.

Friends, family and angels

Statistics suggest that 90% of people willing to invest in your company will be friends and family. The remaining 10% of angel investment is accessed through networks. These networks give companies the opportunity to regularly pitch to registered investors.

With the difficulties involved in getting funding it’s tempting to accept the first offer that arises, but consider it carefully. Choosing the right investor involves much more than simply picking the most financially attractive offer. Your investor must understand the goals and ethos of your business so that you can work together in the long run. Get to know your potential investor, their goals and their desired level of involvement before asking yourself if you can work as a team.

Debt funding

The usual alternative to equity investment from an investor is debt funding from a bank. The major benefit of taking out a business loan allows you to remain in the driving seat of the company and keep full ownership of the business. However, the bank may ask you to personally guarantee the debt and if the business does not succeed then you will be left with the responsibility for repaying this and could lose any assets that were put up against the loan.

Alternative funding

Both debt and equity funding routes have their own specific attributes and pitfalls, but there are now other avenues available for entrepreneurs. On the market there are loans such as a mezzanine loan fund which can fill the gap between traditional debt and equity funding. It can be a standalone funding source, but is best used as a complement to other types of finance.

We have started a new programme called Funding Enterprising Women (FEW!), financed by the South East England Development Agency (SEEDA). The scheme is designed to help female entrepreneurs understand the various funding sources available to them and maximise their chances of successfully raising finance. This includes the chance to showcase and pitch to a panel of supportive investors in a unique environment nicknamed ‘Dragonflys’ Den’.

It’s worth bearing in mind that female investors are often likely to see the potential in ventures led by other women, especially those that target a female market. Women also tend to have a genuine desire to help the next generation of entrepreneurs and to support socially-beneficial products and services. Female business angels typically spend more time with their investee businesses; assisting on strategy development, helping with short term problems, making contacts with suppliers and recruiting members of the management team.

Finance South East is currently launching a ‘Women Investing in Women’ scheme to encourage more women to consider becoming business angels. The scheme will focus on investment in all sectors but with a particular interest in female-led firms or products that would appeal to a female market. There’s a long way to go and it’s going to take time for this initiative to kick in.

Britain’s number of women-owned businesses lags behind many other countries; only 15% of British companies are majority owned by females compared with 30% in America. At the moment women’s businesses command only 2% of the venture capital available in the UK. If we are going to generate a more advanced culture of women’s enterprise access to improved funding must play a big part.

Case study

'I walked away from the business angel idea - it terrified the life out of me'

Nicky Smetham, director of Suburban Turban

When milliner Nicky Smetham set up Suburban Turban - an online retailer specialising in fashionable headware accessories for women suffering from hairloss - earlier this year, she admits knowing where to turn for advice on funding was a huge challenge.

A free three month 'investing in women' course at the University of Surrey proved invaluable, opening Nicky's eyes to the broad range of issues facing women entrepreneurs. '

It was the tool bag to get the business off the ground,' she says. The course also introduced her to experts and mentors and Finance South East.

Despite having initial privately-sourced funding in place, Smetham admits planning ahead for funding hadn't occurred to her.

Being in the start up/early growth phase of business development,

Nicky was looking to source between £50K and £150K.

'I wasn't at the right stage for grants, and I walked away from the business angel idea because of the share of business they would require - it terrified the life out of me.'

In the end, she opted for a small loan agreement, a bank loan where 75% of the debt is secured by the DTI.

Smetham's funding advice for budding entrepreneurs

• Take the longer-term view: 'The need for money is not the same as investment-ready status.'

• Plan, plan and plan again: 'Don't get to the point where you need the money but it won't be available for three to six months.'

• Be passionate about your idea: 'That's how you will differentiate yourself from the competition.'

• Understand the nitty gritty: 'For me, it was ecommerce and search engine optimisation. You must be able to prove that you understand that side of things if you're looking for funding.'

www.suburbanturban.co.uk

Sally Goodsell is CEO of Finance South East