The idea of setting up a business appeals to many people. But to turn the dream into reality takes money- you’ll need to raise funds for your business. And, if it takes off, you’ll probably need further financing to grow. There’s a wealth of options available, but which is best for you, your business and current situation? You may find you need more than one source of capital for your business over its lifetime. Let’s take a look at the various options:
Bootstrapping – best very early on when there’s no or limited team costs
If you build your business without borrowing money or parting with equity, you’re ‘bootstrapping’. Instead of seeking funds from external sources, bootstrappers use their personal income and savings to support the business. They also focus on operating at the lowest cost possible. Some of the world’s largest companies started out as bootstrapped ventures, including the likes of Apple, Burt’s Bees and Coca-Cola.
Grants – best suited for early-stage, good throughout
If you’re developing a product or service, you may be eligible for a grant. It might be worth taking a look at the government’s Finance and Support for your Business site and researching the options that are currently available. Some universities also provide grants that are usually designed to help early-stage spin outs or to fund research. But, note that grants often involve significant application administration and time to secure.
Debt financing – an option for those who already have cash flow
If you need funds and can demonstrate a reasonable cash flow, debt financing may be most appropriate. This can take the form of:
- Bank loans – These fall into two types; Unsecured business loans and secured business loans, which are typically taken out from a bank or building society. With unsecured loans, the amount that can be provided and the interest rate you’re offered will depend on your personal credit rating and the creditworthiness of your business. Because this type of loan isn’t secured against your home or business, the amount you could borrow will probably be relatively small. To borrow more, you may consider a secured business loan. A secured business loan can be secured against your home, the stock you’re purchasing and on the assets belonging to the business. Depending on the assets you can put up as security and your circumstances, you may be able to borrow substantial amounts.
- Government-backed startup loans – Exclusively for startups. If your business is just getting off the ground, it’s worth looking into government-backed schemes to find out if you’re eligible for any start-up loans. is a government-backed scheme that’s designed to help people start or grow a business in the UK. As well as a loan, you may be able to get free mentoring.
- Peer to peer lending (p2p) – The loan comes from private lenders and firms. This type of loan is carried out through an online platform. Some, such as Funding Circle, lend from £5,000 to £1 million. A more competitive interest rate on borrowing is usually offered than banks can provide. And, the funds are usually paid a lot faster than if you went through a bank. Once approved, they can generally be paid out within two weeks.
- Invoice financing – If you need additional money for cash flow purposes rather than in a few months when a large invoice is due to be paid, invoice financing may be appropriate. With invoice financing, a third party ‘buys’ your unpaid invoices from you and lends you money against their value.
There are two types: factoring and invoice discounting. With factoring, the invoice financier (such as Market Invoice) collects the money owed to you by your customers. With invoice discounting, the invoice financier lends you money against the value of your unpaid invoices, but you collect the money from your customers as usual. You then use this money as it comes in towards repaying your loan. Best for well-established companies that have a bit more financial certainty.
Reward-based crowdfunding –for pre-launch and creative businesses
This can be likened to pre-ordering. As well as securing funds, you could also gain early brand ambassadors. You access the service through a platform, such as Kickstarter. People provide funds in return for receiving the finished product at a later date. Sometimes they receive a discount against future purchases or other rewards. This type of funding can help you to build up a lot of loyal supporters and raise a high amount of capital if it proves popular.
Equity funding – ideal for a range of businesses/stages
With equity funding, you receive investment in exchange for transferring a percentage of the ownership of your company to investors. There are a few types to consider:
- Incubators and accelerators – best for very early stage
This type can provide both funding as well as valuable support. Some specialise in particular sectors, which can add extra value with tailored advice provided. You may be offered space with the accelerator, where you get advice from advisors and successful entrepreneurs. The aim is to fast-track your business for further growth and gain additional investment.
- Equity crowdfunding – ideal for a range of businesses/stages
Investors view business pitches via an online platform – such as Seedrs. The business decides the amount they need to raise and the amount of equity that they’re prepared to offer investors. The platform works on an ‘all or nothing’ basis, so unless the funding target is met the business will not receive the funds.
Typically, you’ll attract a large number of investors from the businesses community, such as customers and suppliers and from the investment community of the platform, while building brand awareness and generating buzz about the business due to social media and press coverage.
- Convertible equity – best for a fast-growing startup or early-stage
This is very similar to equity crowdfunding, in fact, Seedrs also offers convertible equity. The difference is convertible equity allows the company to raise money in exchange for issuing shares at a later date when a specified trigger event happens, usually the next funding round, such as a Series A. In return for investing early and taking on a higher risk, investors receive a discount on the price set by the next funding round.
‘Raising a convertible’ enables a company to raise finance without having to put a value on the business. This is useful because valuing a fast-growing startup or early-stage company can be pretty awkward in the early stages, with so little time to have built up a track record. Instead, a valuation can be delayed until a major financing event, such as a larger funding round. By the time this event takes place, there may be more facts and figures to help establish a valuation.
- Angel investors – best for early/mid stage
These are high-net-worth or sophisticated individuals looking to invest in a portfolio of other businesses. As well as helping to raise money for your business, they offer to share their expertise and contacts. Angel investors invest alongside the ‘crowd’ on Seedrs.
- Venture capital firms – best for mid/later stage
At this stage, the business model will have been proven and the focus will be on looking to scale. VC’s typically invest larger amounts. They can manage investment from a wide range of investors but may also be investing on behalf of pension funds. Be prepared for a high level of scrutiny. Also, VCs may demand a high level of involvement in your business to help drive growth and see a return, as they’re acting on behalf of clients who are seeking significant returns. Venture capital funds invest alongside the crowd on Seedrs, on the same terms.
Which route is right for you to raise funds for your business?
It’s not easy to decide which option to go with to raise money for your business. It is likely that over the life of the business it will utilise a combination of the above options depending on the need at the time.
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