The company’s off the ground. We want to expand. We want to develop ideas, but it needs an injection of cash. What are the options, sources and what do we need to do?
If you go to your bank when you are overdrawn, the bank is less likely to loan you money then if you have a large amount in your bank account. Why? Because they are more confident that you will pay them back.
So, when you are looking to raise finance, do it from a position of strength, not because you are just about to go bust! We know what the answer will be.
There are three principal ways of raising an investment into the company:
Loans - Cash made available, usually secured against either business or personal assets
Equity - Cash given in exchange for shares. The smaller the company, the higher the cost in terms of percentage of the company required
Grants - Cash given for specific purposes whereby it is used to meet the goals of the lending organisation
However, in recent years, fourth option has become available:
Advanced Sales - By using crowdfunding techniques you can pre-sell products to obtain the funds to complete developments of products
All end up as a personal loan, either directly or through your company as a personal guarantee
Start-up loans - These are often easy to set up over the phone/internet, require a cut-down business plan and need to prove that you can keep up the repayments. Company will be less than 2 years old. Rates are low and they last up to 5 years.
Bank loans/overdrafts - Usually require a Business Plan and meetings with the bank manager. They will usually try to help if you have difficulties. Loan periods are often flexible.
Peer-to-peer loans - Require a business loan and can be a lengthy process to get the loan in place. Rates tend to be higher.
Invoice discounting - Can be useful if you have large customers. Range of suppliers from single invoice to all invoices for a minimum 12-month term.
Asset loans (HP/leases) - Efficient way to spread the cost of the use of equipment over its lifetime.
Investors will buy part of the company. They are hoping that thy will be rewarded through the success of the company. However, you can only sell the equity in the company once. If you sell it when the company is young, the price will be lower than if you have more success.
You will need to produce a business plan and if you are looking for Venture Capital (typically in excess of £1m) you will probably need the help of a well-connected accountant or advisor. Angels invest at lower levels and at an earlier stage and usually offer business support in addition to the injection of cash. In both cases you will be involved in legal expense in agreeing terms and conditions.
Investments are also possible through Crowd Funding. It is more prevalent in the USA, but is available here. You do need to put in a lot of effort marketing it to attract enough people and, if successful, you may have a large number of shareholders, who will need to be kept informed.
To obtain a grant you must fulfil the initiative stated by the lender. For example, there are grants for innovation and for creating jobs in deprived areas. Most grants are regionally based and your Local Enterprise Board (LEP) is a good source for signposts to those grants.
There is often an application process, which must be completed with care as most applications are rejected because they do not meet the requirements of the fund, rather than the concept not being good enough.
Crowdfunding can be hugely successful, but it can also be a drain on your resources. There are 2 methods of crowdfunding – equity and sales. Equity funding is where you gather enough investors to raise the money required. Sales funding is where you offer either advanced sales of goods/services or some other incentive in exchange for money. Both require a lot of proposal marketing and can be very time consuming.
Nothing in this article is advice. It is outlining different ways finance may be raised. You always need to obtain advice from an IFA or similar type of person in order to decide whether to take any of the options outlined here.
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Last updated: 23 January 2020 | © KIS Bridging Loans 2020 |