sq - finance

December 06, 2019

8 ways to finance your business

By Natalie Howells

You've got an innovative product or idea. You've done the research and you know it's definitely worth taking forward. So now you need funding to get your business idea off the ground. Where do you start?

Depending on where you are in your business journey, you may need a little money or a lot of money to get started. There are a variety of ways to get money for your business, and they all come with their own benefits and downsides. As your business grows, you may well use more than one of these options - any ambitious business is going to need capital at various stages, from starting to scaling up, from entering the market to owning it. 

Understanding the different financing options available gives you a head start in working out what direction you want to go in. So, here are the top 8 approaches to funding a business. 

Use your own money

If you have savings of your own, they're a great place to start. Interest rates on most savings are pretty dire, so investing in your own business could do a lot more for you than leaving that money sitting in your account. 

Combining your savings account with credit cards, overdrafts, and any home equity you might have - sometimes known as 'bootstrapping' - is one way to maximise your pool of money without taking on external finance. 

Pros: You keep complete ownership of your business, without giving away any equity. You won't have extensive loans with high monthly repayments. In later funding stages, you will have much more credibility if investors can see that you have put your own money into your business.

Cons: You're limited by your savings pot - growing an innovator business can be costly (hence the old adage "you've got to spend money to make money") and unless you have a lot of money in the bank, you may well be unable to scale up as quickly as you could, due to not having enough capital to invest. While this might be suitable for small scale businesses or a proof of concept phase, for most businesses with ambition, bootstrapping is unlikely to be a long-term strategy. 

Using your own money also limits your access to wider business knowledge, which can be hugely beneficial, especially to startup and scaleup businesses. 

Borrow from family

Perhaps you don't have a lot in the bank, but you have family who're willing to share their savings and invest in you and your business. To protect everyone involved, you should draw up some paperwork to lay out exactly what you're all agreeing to. Is this a gift, an investment, or a loan? If it's a loan, what are the payment terms and what happens if you have a cashflow crisis - will you be able to defer payments? If it's an investment, how much equity will they be getting? Make sure you value your company and have clear forecasts - you don't want to give away a 50% stake for £20k if your business is already forecasting at being worth £100k, for example. 

Getting all of this laid out to start with is important - just because you're borrowing from family, doesn't mean you can forgo the business and professional standards - you'll both be grateful in the long run. 

Pros: speed - you likely won't have a lot of hoops to jump through when it comes to getting a family loan, so you can get up and running faster. Chances are you'll also have more favourable lending terms than you'd get from a bank. 

Cons: there can be a lot of cons when it comes to mixing family and money, so this is something to bear in mind before considering this option. Relationships can change significantly when finances are involved, and taking a risk with cash that belongs to a family member can lead to hesitance, guilt, or risk-aversion that may hinder your progress. You may find that your 'investor' feels like they should have a say in what you're doing, which can lead to frustration. Family members might feel pressured to invest when they're not actually comfortable doing so, too, so you need to be careful to ensure everyone involved is happy with the arrangements before anything is signed. 

Try crowdfunding

If your innovation is something that appeals to a wide audience, or is something tangible that people will want to buy, crowdfunding is an interesting option. Sites like Kickstarter and IndieGoGo give you a platform to raise money from individual contributors. 

You should make sure you understand the differences between the platforms before deciding which to choose - for example, Kickstarter only allows you access to the money if you hit your funding target, while IndieGoGo allows you to keep whatever you raise (less their cut). Kickstarter tends to get more media coverage, and reportedly has a higher rate of successfully funded projects. Both have the same 5% platform fee, and equivalent processing fees. 

Pros: You'll be part of a ready-made platform, which adds some level of credibility to what you're doing (although see the 'cons' section for a caveat here) and a mechanism to manage the income. By getting investment from many individuals, you're not having to ask for one big lump sum from anyone, making it easier for people to get involved. 

Cons: You'll need some digital marketing skills to make the most out of your campaign - which is fine if you have the knowledge and time, but may be a headache if you're trying to handle that at the same time as setting up your business. If you don't reach your funding goal, you either don't get anything (Kickstarter), or you get something (IndieGoGo) but it might not actually be enough to deliver on your rewards, leaving you struggling and your customers angry. Enough high profile crowdfunding campaigns have ended in failure for people to be rather skeptical, especially of innovations that seem too amazing. 

Get a grant

While this might be easier said than done, there are thousands of small business grants on offer that can be a huge benefit for innovators looking to go to market. Finding them and then getting through the application process is the challenging part of this, and it can certainly take considerable time and effort. But they're an excellent opportunity to get the funding you need to start or scale your business. 

Start looking on the Government's 'business finance support finder' and you'll find 166 different schemes (at the time of writing), including loans, grants, business advice, and investments, across the UK. On top of these, there are incubator and accelerator schemes all over the country, offering support, advice, packages that provide access to training or expertise, and networking opportunities. 

Pros: Many of the grants and incubators specialise in specific areas, so you can find a great fit for your innovation and access like-minded experts to help you. Grants can range from a couple of hundred pounds to hundreds of thousands, or include equipment and tools to get you going. In some cases, you don't have to pay them back or give up any equity at all. Others include interest free repayments - so it's worth doing your research before selecting the one(s) that best apply to you. 

Cons: It can be time consuming to go through the process of accessing grants, and there will be many that you don't meet the criteria for. You also need to check that you're not going to prevent yourself being able to qualify for one grant by utilising a different one - you can't always have multiple on the go. But, for the benefits available, the cons are pretty minimal; just make sure you do your research before you start. 

Work with an Angel Investor

When you work with an investor, you're working with an individual (or, sometimes, group) - so getting the right fit for your business is important. You have the opportunity to engage with someone with business expertise and experience that will be a huge benefit to you, so take the time to find someone who will add value beyond finance. 

Angel investment is one form as seed funding or seed capital - which is generally the first phase of asset-based financing and generates capital to turn an idea into a working reality. There are larger seed funds, too, so it's worth checking whether those are a better fit. 

Pros: access to expertise and experience, plus contacts and networks that could be highly valuable to you. Many Angel Investors act as mentors and coaches, helping you accelerate your business growth in ways you might not have anticipated. Your business will be scrutinised to ensure it's a worthwhile investment, which can highlight areas you need to spend more time on - a hugely valuable insight. 

Cons: you'll be working with this person for quite some time, and if there isn't a good relationship, you may struggle. You can't just fire them - if you want to end a relationship, you're going to have to find the funds to do so (which is why it's so important to find a good fit from the start). The scrutiny can be challenging to deal with, especially if you don't agree with your investor's analysis. You'll also have to give up a chunk of your business and some control. 

Engage with Venture Capitalists - Series A

If you're at a stage where you need to generate a large sum of investment to get to the next level, it's time to look at venture capital. This is where Series A and Series B funding sit, and they represent much larger investments than seed funding. 

Series A is the first round of funding after the seed stage, and is still fairly high risk as your business is still proving itself, despite having developed some track record. 

To achieve this kind of funding, you will need a realistic and robust business model that will deliver long term profit - you need to know how to monetise your innovation and generate revenue from your user base. Investors aren't just looking for great ideas, they also want to see that you have a strong strategy for turning that idea into a scalable, money-generating business. 

Pros: your business plans will be scrutinised, so if you succeed in raising series A funding, that's an indication that people believe that what you're setting out to achieve is possible. If you're looking to raise millions rather than thousands, venture capital is your best chance - this is where the biggest investments come from. VCs can be very hands on, and the best ones invest time and knowledge as well as money. They can also provide access to their network - which can be hugely beneficial, especially for future fundraising.  

Cons: you'll have more people expecting big things from your company (this is also a pro, but the pressure can be challenging for some people) - and you'll have less control overall. VC investors may get heavily involved in running the business and may require seats on the board. The process can take a long time - many months - so it's not the best option for a quick influx of cash. Many people will say no, which can be discouraging, and you may have to make multiple attempts and changes before you secure your funds. 

Engage with Venture Capitalists - Series B

Once your business is a proven entity, series B funding is all about taking it to the next level, expanding your market reach. Once you've been through a seed round and series A, and proved to investors that you're prepared for success at a larger scale, series B is there to grow the business and meet the demand of a larger user base. 

Many of the same players from series A rounds will be in play at this point, but there will also be new venture capitalists that specialise in later stage investing who are now interested. Private equity firms may also get involved at this stage. 

The main criteria at this stage is profit and company value - so your forecasts and competition will be under scrutiny. 

Pros: the funding limits are at their highest here, giving you access to a larger pool of money from which to really accelerate your growth. 

Cons: the VCs will be looking at exit value, so their goal will be to sell the business within a certain timeframe. If this doesn't fit your ambitions, that can be a challenge, as you'll both have different objectives that may not follow the same path. This is a harder stage of funding to access. VCs can hold a large proportion of your business in return for investment, which can give them more authority than you as the founder. 

Take out a bank loan

Debt financing is an alternative to equity financing (which is what seed, series A, and series B funding are - you get finance in return for equity). If you don't want to give up any equity, your other option is to borrow the money from the bank. 

You may find it difficult to get a business loan if you don't have a proven track record as a brand new business or innovation. Banks are often much more traditional in their lending than equity financiers, so you may have a harder time convincing them that your business is worth it. 

Taking out a personal loan rather than a business loan may be an option. There is a scheme where you can apply for a government-backed start up loan of £500-£25,000 - these are unsecured personal loans that also include support and guidance. The interest rate is 6% and the term is 1-5 years. Other personal loans may also be an option, but take account of the different interest rates and make sure you'll be able to repay what you borrow. 

Pros: you don't have to give up control of your company - you won't have the objectives of investors to worry about. Unsecured loans don't put your assets at risk. There may be some tax benefits - interest paid on business loans can be a deductible expense. 

Cons: you'll have to pay interest on your loans, which can add up to quite a sum depending on the rates and the length of the loan. If you have to put down collateral against the loan you could lose your house (for example) in the event that the business is not doing well. Cash flow problems can suddenly make it difficult to pay back on time, which can spiral into a much larger issue over time.  

No matter which option you choose, business funding is there to help you achieve your goals. Incidentally, that's also what we do here at SpiderGroup - we work with ambitious, innovator businesses to achieve growth through digital and technology. Want to know more? Get in touch; we'd love to have a chat. 



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