09 Nov Sources of finance in 2017: 9 start-up funding options for your business
My business partners funded their first business in 1992, with a £2,000 loan from one of their mothers. She drove a hard deal – if she wasn’t paid back within six months she’d take 50% of their business. It focused them both. After 182 days they paid the loan back, with interest.
For my first business in 2004, I secured a government backed loan for £80,000. There were scare stories of many pitches leading nowhere, but I got to choose between three offers from three meetings. My business plan was beautiful; the operational reality was much less rosy. I sold the business and paid back the loan after two years.
Cash from those that love you and bank loans are both still funding routes but there are many more options. Each has implications that can remain for the life of the business.
Generally speaking, loans may be an option for businesses generating cash or buying assets that can be easily converted back to cash, therefore providing some security to the lender.
Selling equity may be the only option for start-ups that either need time to get to their first revenue, are spending on intangibles like marketing or product development or are going to forgo early profits to grab market share fast.
So here’s my take on nine options for every start-up to consider:
‘Family, friends & fools’
A traditional route for either a short-term loan or long-term equity. Often the easiest and quickest option but fraught with risk. Even unconditional love can be strained if the business runs into difficulty, and who wants to be quizzed on Christmas Day about cashflow and how fast the business is growing?
The government backed scheme that lends up to £25,000, at 6% interest with no arrangement fee. They work with local delivery partners and set up a mentoring arrangement – you’d want to embrace that as a positive help, not see it as monitoring or interfering.
An option for businesses that can prove early and regular cashflow. Banks are under a lot of pressure to demonstrate their support and funding for growth businesses. However, in the first couple of years of trading, business owners are likely to have to provide a personal guarantee. So, as they say, your home could be at risk if you don’t keep up repayments.
Peer to peer loans
Funding Circle is one example of new marketplaces that connect lenders with businesses. Interest rates and whether the loans are secured or not will depend on the assessment of risk, the reliability of cashflow and the liquidity and value of the businesses’ assets.
If you believe in your business, need to invest before building revenue and want to avoid giving away equity, then you’ll want to dip into your savings. If you subsequently raise equity funding, investors will value the commitment you have shown by risking your own cash.
A growing community of wealthy investors are encouraged by generous tax reliefs. Angels typically each invest between £5,000 and £100,000. Sometimes they’ll do this in a group that invest together, or will act as a syndicate of half a dozen or so that has been constructed specifically for an investment in one business. Either way they are likely to demand an ‘Investor Director’ to represent them on your board. If you are fortunate to have a choice of investors, you may be able to go for ‘smart money’ – investors that have and are willing to share expertise and contacts within your sector.
You can find angels independently, using LinkedIn for example. But it’s a whole lot easier to tap into one of the many networks, generally charging 5% to 8% of the funds raised, for making introductions. Regardless of how you find them, you’ll been to spend a lot of time meeting angels and pitching your story. It is essential to understand the investor benefits and start-ups requirements of the Seed Enterprise Investment Scheme (SEIS) – you can you read more about this in my next blog.
In just three or four years, the likes of Seedrs, Crowdcube and Syndicate Room have become a useful source of start-up funding. Although their growth appears to have stalled – crowdfunding was down 20% year-on-year in the 3rd quarter of 2016 (Source: The Deal, Beauhurst, November 2016).
Investors generally invest between £100 and £50,000 through crowdfunding (with a long tail at the bottom end and very few at the top). A business raising £100,000 could easily end up with hundreds of shareholders. For some businesses, it’s helpful to have investor advocates spreading the word but a long list of shareholders can be unattractive later down the line. There is a significant up-front time investment required to create a compelling campaign, but then little to do whilst the campaign runs, other than answer questions and keep fingers crossed. Crowdfunding is not as democratic as we’d all like to believe. For a campaign to be successful, about 30% of the funding needs to be committed before kick-off (the crowd follows the crowd).
For a business with an innovative and tangible product that can get shipped around the world, sites such as Kickstarter or Indigogo are a fantastic way to finance the initial production run through the customer paying up front. Although there is usually a significant investment to get to the point of being confident in production.
A new option for investors that like the tax reliefs available from investing in start-ups, but haven’t got the time to consider their own deals, is to invest in a fund that will give them a diversified portfolio of investments. If a start-up can attract investment from a fund it is a very efficient option. Fees are similar to those charged by angel networks, but for one conversation and one set of paperwork for the entire funding and subsequent shareholding. Generally the funds backed by sophisticated investors and well placed to give access to follow on funding as the business grows.
You’ll have to consider that I could be a little biased. I’ve had loans, am an angel investor and have been an equity and product crowdfunder. Now my business, Worth Capital, has the fund that invests in the winners of the Start-Up Series. You’ll need to find the funding route that is right for your business. Good luck!