Financing your business

Exploring various funding options for your new business

After coming up with a great business idea and have determined it’s viability in the real market environment, you may now be wondering how you will be funding your business, looking for sources of funding or where to get capital from to take your business idea to the next level.

You may or may not have made your own initial investment in the business at this point but are now ready to learn more about some of the funding options that are available for your business.

Is it time to seek capital for your business?

As you may or may not be aware there are various ways of raising capital for your business. There are also alternative funding options suitable for specific business financial needs. Within this section we will cover different types of finance corresponding to different stages of business development. We also examine how some businesses such as start-ups with high growth potential may benefit from certain types of funding to develop a product before moving onto funding from business angels, venture capitalists or banks once the product is developed.

Some forms of financing may not be appropriate for your business. This section will help you identify and determine when that may be the case, and where you may access alternative funding.

1. Revenue or Bootstrapping

This is one of the most popular ways of starting a business also commonly referred to as ‘bootstrapping a business’ meaning starting or growing your business with little or no money. It means relying on your own money, savings and revenue to start and operate your business. This also means no debt finance, venture capital or any outside investment. Although this may not be the easiest way to start a business, it is however, achievable and can be extremely rewarding and empowering when done right!

Many entrepreneurs and SMEs start their businesses with little money as it can be extremely challenging to convince many lenders to offer debt finance or investors to invest in early stage or pre revenue businesses.

It’s also important to stress that not every business requires capital or a lot of money to start. Let’s say you are starting a marketing consulting business after many years of working as a marketing consultant. You then decide that it’s time you left the labour market and set up your own consulting business. Based on your previous skills, experience and expertise, your business is likely to take off well without the need for extra finance. In this case you are simply starting a business by utilising your existing skills without the need for financial help or any other additional resources.

2. Friends And Family

As you may or may not have heard before, this is more often suggested or advised by many lenders to first time entrepreneurs or anyone starting their own business for the first time! However, many aspiring entrepreneurs and small business owners do find this conversation very challenging. Even though many business finance experts and advisors suggest that family and friends should be your initial source of finance for your new business, it’s usually easier said than done. Unless you happen to have or know very wealthy friends or have a network of friends and family who are willing to support your new business at the most critical and risky stage then this form of finance can be the most challenging one.

On the other hand if you happen to have a network of family and friends who are able to support and help finance your new business venture, this would be an ideal source of affordable business finance.

3. Consumer Crowdfunding

Consumer crowdfunding is a form of funding in which the entrepreneur or business involves consumers to finance the production of a product or service that is either still at the planning or early stage through an online platform. This method of raising finance may involve a reward-based program where the consumers are offered rewards for helping to fund the product or service. Consumer crowdfunding is not necessarily based on profit-related purpose.

There are a few consumer crowdfunding platform such as Kickstarter, Crowdfunder, Fundable, Indiegogo just to name a few.

Let’s say you are starting a subscription-based business offering monthly subscription boxes containing personal care and beauty products to your subscribers. One way you can use consumer crowdfunding is to start a fundraising campaign on one of the crowdfunding platforms where you can set a goal of raising a certain amount of capital to fund the production and design stage of the business. Consumers will then subscribe to your personal care and beauty product boxes and pre-order their boxes, particularly their first box before the products are even completed. You will also need to offer discounts as one form of your rewards. This way you will not only have new orders and revenue, but you will also have ready consumers waiting to buy your products.

Consumer crowdfunding usually work well with product-based businesses although nowadays it has been successful with non physical products as in the case of health and fitness subscription models.

One thing to consider when choosing this method of raising capital is that it not as simple and straightforward as it sounds! In order for your fundraising campaign to be successful you will need to dedicate a lot of time and put in a lot of effort in planning and executing this campaign. You will also need to work extra hard to form a group or network of consumers to support your campaign.

4. Equity Crowdfunding

Equity crowdfunding enables entrepreneurs and businesses to raise funding from multiple investors in a regulated way. Businesses list on an online platform, where investors and members of the general public can buy shares in the business.

Equity crowdfunding platforms will assess your business and associated documentation to ensure they comply with its requirements. Some platforms will also help you choose the time-frame or investment amount you to for.

Every crowdfunding platform is different. Some platforms will manage your shareholder communication, whilst others offer advice. Businesses should speak to the platform providers about their services and specialities before they commit to listing.

5. Peer-to-peer Lending

Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Lenders, who are usually individuals receive interest and hope to get their money back when the loan is repaid. The online platforms bring together people or businesses that want to lend money with those that want a loan as a way for borrowers to access funding without using or going to the banks.

What’s the difference between Equity Crowdfunding and Peer-to-Peer Lending?

Whilst equity crowdfunding offers investors a small share of your business in return for money, peer-to-peer lenders loan money to your business in return for a fixed return over a fixed period. The two often get confused but there are important differences. Each has different benefits and suit companies at different stages of their growth and lifecycle.

Equity crowdfunding platforms include Crowdcube, Seedrs,SyndicateRoom just to mention a few. Peer-to-Peer lending platforms include Zopa and Funding Circle.

You should consult a qualified financial adviser if you are unsure about the options available to you.

6. Debt finance

Debt finance is one of the most widely known form of finance for many entrepreneurs, SMEs and other larger organisations. It is also one of the least expensive ways to raise finance. It is most suitable for established lower risk businesses, usually with a stable cash flow in which to repay the debt. Loans and overdrafts are the most common forms of debt finance. Debt finance includes various forms of loans such as those provided through banks, government-backed, credit cards, lines of credit, equipment and commercial loans.

The lack of access to external business finance affects many entrepreneurs and businesses, particularly new entrepreneurs and SMEs and this still remains one of the major challenges facing small businesses and start-ups in the UK. Entrepreneurs and SMEs across all stages of their business life cycle require access to suitable sources of external financing for their early stage and growth.

For many new entrepreneurs in the UK access to debt finance has been a major barrier particularly after the financial crisis of 2008. Although the economy has been slowly recovering, access to credit still remains a challenge.

Many new entrepreneurs and SMEs face strict lending criteria set by financial credit providers and investors hence being turned down. Mainstream debt finance is the most common form of external credit for most entrepreneurs and SMEs as they rely on more traditional forms of debt finance options to start, sustain or grow their businesses.

7. Equity finance

Equity financing (also known as venture capital) is the process of raising capital through the sale of shares in your business. This means that as a business owner you offer shares or part ownership in your company to an investor in return for cash. Equity financing can be raised from many sources including friends and family, entrepreneurs, investors, or an initial public offering (IPO).

Equity finance is a vital source of funding for some businesses, particularly those with a high growth opportunity. Although often referred to as ‘high growth opportunity’, equity finance is only suitable for certain types of high growth potential opportunities. Most investors who are involved in providing this type of finance look for high growth opportunities with innovative products or concepts, defensible business models, provable traction as well as problem and solution validity. Other aspects of the business they look for are experienced teams and some proof of sales activity.

Most venture capitalists (VCs) have a certain type of businesses or portfolio they invest in. For example there maybe investors who are only interested in tech-based high growth opportunities such as agri tech, food tech, health, edu tech, mobile tech, prop tech etc. Hence even if your business is a high growth opportunity but doesn’t fall within this category then the chances of that business being invested in will be slim.

Although many VC companies concentrate on high growth business opportunities, they are nowadays VC companies that invest in overlooked founders and markets across the UK. Markets include heath and fitness, food and drink, women and diversity, ageing, population, consumer communities and conscious markets.

Even though equity finance may sound attractive and helps high growth businesses, it also comes with a range of strict measures such as huge pressure on the entrepreneur to expand or grow at a very fast and successful rate. Other measures include taking on management who may take charge of your business and may take control or make decisions on your behalf or even change the direction of your business. You should also be prepared to sell the share of the business that you offered to the the VC when they are ready to exit.

8. Business Angels

Business Angels are usually private individuals or groups who invest in high growth startups and early stage businesses in exchange for a stake or share of the company’s equity. Business Angels have increasingly become a vital source of funding for early stage businesses who now supply a relatively similar amount of equity finance to entrepreneurs and businesses as venture capitalists.

Business Angels use their own money to invest in businesses that they would like to support and this can be done either as an individual angel or through a network of angels. Some business angels have or previously owned successful businesses of their own and have experience or expertise in particular industrial sectors or markets. Many take an active role in the businesses they invest in by advising and mentoring the management.

Many business angels make these funds available to these high growth startups and early stage businesses for product development, market expansion and team building. Business angels often do get involved in the businesses are there to offer advise and mentoring. They typically make investments from as low as £10,000.

Many business angel arrangements or contacts come either through angel groups, networks or simply informal contact such as friends and family, entrepreneurs, wealthy business contacts, suppliers, clients and sometimes customers.

9. Asset-based finance

Asset-based lending is any kind of lending secured on an asset. This type of lending refers to finance secured against a business asset such as inventory, machinery, equipment or property which is used as collateral. This means that if the loan is not repaid the asset is taken. A typical example of this type of financing is a car finance or a mortgage. Asset-based finance can also include intangible assets such as Intellectual Property (IP).

Asset-Based lending is growing in popularity in the UK as it allows businesses to unlock the value tied up in assets like debtors, stock and equipment, and provides funds quickly. Types of asset-based finance include finance lease, hire purchase, operating leases etc.

10. Accelerator

Startup accelerators support early-stage and startups with high growth opportunities, through education, mentorship, and financing. Startups enter accelerators for a fixed-period of time as part of a cohort. Accelerators typically offer seed money in exchange for equity in the company. This may be as low as £10,000. There are various accelerator programs across the UK and worldwide and most of them do offer various support services such as mentorship, workspace, networking events and grants.

11. Strategic Investments

Strategic investment is where you allow another business or company to make an investment in your business. Your two businesses then enter into agreements that are designed to serve shared business goals. This type of arrangement is similar or closely related to a joint venture or joint ownership.

For example your business or company may seek to enter into a joint venture with another company whose goals strategically align with yours. Let’s say your business is an emerging healthcare technology company that provides products to the healthcare sector, a major technology company may form a joint venture with you to help further or foster innovation by providing additional infrastructure such as manufacturing facilities and machinery.

12. Start-up Competitions

As you may have seen or learned from this section it can be quite challenging, time consuming, frustrating and involving for aspiring entrepreneurs or businesses to launch a startup or acquire funding for their businesses. As you are new to entrepreneurship or your business is new you may not have built enough credibility, industry contacts, networks, investors or have alternative funding options other than your own or lack of it!

Therefore to start establishing yourself in the industry or sector you are in it may be beneficial for you as well as your new business to participate in competitions for startups. Most of these startup competition events are held regularly, where participants win cash prizes towards their startups or scaling their businesses.

However, many startups and businesses do not enter to win the top prize as these platforms are also an ideal place to showcase and promote your new business as well as your products. You may also make connections and meet industry experts as well as potential customers for your products or services. These new connections and contacts could further lead to other opportunities such as investment and partnerships. One of the most popular startup competition is The Pitch, a contest where entrepreneurs present their business concept to a panel in the hope of winning a cash prize or investment capital.

13. Government And Private Grants

There are a range of startup business grants available for entrepreneurs and startups depending on the sector the business operates in. For example if your business involves creating products or services associated with STEM (science, technology, engineering, mathematics) or caters for any such markets you may qualify for some of the grants. Examples of some of the available grants include Innovate UK, Research and Development (R&D) reliefs, The National Lottery Heritage Fund and Local Authorities.

Finance or Investment fit

As you can see from all the finance sources and options that we’ve covered, the funding option that’s available for one type of business may not be appropriate for another business or vice versa. So as you start your business and embark on seeking finance for your business, you should at least find out more and assess which type of funding maybe suitable for your business as well as determine the accessibility of that particular funding.