There’s a tendency among owners of creative businesses to steer away from more traditional sources of finance, and to use their own funds instead.
Research from the Creative Industries Council (CIC) shows 58% of people in this sector had used personal funds in their business, compared to 22% of businesses more generally.
Just over a quarter (27%) had sourced funding from friends and family, compared to 9% across all industries.
That might be because for many in this sector, their work is a personal interest as well as a business. It’s something they’re passionate about, and into which they’re willing to put more of their own money.
It could also be down to a perception that creative businesses, with ideas that are often innovative and untested, are at odds with the priorities of commercially-driven finance providers. The potential return on investment can be harder to put down in writing.
When you’re starting a business, some amount of self-funding is often unavoidable. But over time, avoiding external finance altogether could end up limiting your business’s growth.
Is it really harder for creative businesses to access finance?
Among the businesses surveyed by the CIC, 67% thought lenders found their sector hard to understand, and 61% said their sector struggles more than others to get funding.
Many of these businesses have most of their value in intangible assets and intellectual property, and there’s a sense that finance providers are not easily convinced by this.
Plus, the ups and downs of project-based work can make it hard to maintain a healthy cashflow and prove the overall profitability of the business.
Government research appears to back this up, too, as it shows software and creative content sectors are more likely than other businesses with similar risk profiles to have their funding applications rejected.
However, the same research showed these businesses are not actually any riskier compared to the rest of the economy.
There’s also evidence to suggest there are high numbers of ‘discouraged borrowers’ in the creative sector. These businesses don’t seek finance because they think their application is likely to be rejected, whether or not that’s actually the case.
Plus, creative businesses that do receive offers of finance are more likely than others to turn them down due to the terms, such as a request for personal security or high fees on a loan. Many are also wary about losing some control over their business to an outside investor.
Overcoming the barriers to finance
While understanding between creative and financial sectors could be improved on both sides, there are a few ways businesses can change their approach to improve their chances of getting finance.
First of all, you should be clear about your reasons for seeking finance. Is it to solve a cashflow problem, to invest in research, or to expand your products and services?
This should be the starting point for researching your options and understanding the type of finance you need. It means you won’t be wasting your time – and an investor’s time – by seeking investment when you would actually benefit from a bank loan, or vice versa.
Depending on the type of work you’re carrying out, you may be able to benefit from government funding schemes or targeted tax reliefs, so these are worth looking into.
You’ll also need a thorough and accurate business plan. This is a step many creative businesses miss out, but it’s essential for anyone seeking finance and a valuable tool for running a business.
The key here is to be succinct and focus on the facts. You can read more on our tips for creative industry business plans here.
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We can help you to access finance, by advising on your business plan and giving you the tools you need for effective cashflow management.