Whether you’re looking for short term finance or long term finance, raising business finance is a question of making sure the funding matches the need.
There are a myriad of opinions available, including secured and unsecured business loans, start-up loans and invoice financing and equipment finance and it can be an intimidating journey to commence. Here’s my guide to the six main ways of raising finance and who they’re most appropriate for.
Self-funded does what it says on the tin; you stump up the cash yourself. But there are a few things to consider. Firstly, that the amount is appropriate. So, if you want to start a business from your home and sink a few grand in to see if there’s something there, then fine, but if you’re needing hundreds of thousands of pounds worth of equipment, then not such a good idea. Also crucial is that you use money which, although you wouldn’t be happy to lose, you are able to lose.
- Friends and family
This is an expansion of self-funding that comes with some clear benefits, ie, you get funding, alongside some obvious dangers. Borrowing £20,000 off your ageing gran to invest in some hair-brained scheme is clearly a terrible idea, but if you’ve got a well thought through business plan with defined milestones in place and it’s a controlled, clear project that’s been disseminated by people so they can choose to make an honest appraisal, that’s much more appropriate. Always make it a formal arrangement – you’re friends today but might not be tomorrow. Nothing should be any different from any type of loan, but friends and family can be less complicated.
You may have started your business with self-funding but the time has now come to get a product to market so you need to invest in product development, design and finish. This is when you should think about sitting on a crowdfunding website. There are four different types of crowdfunding; rewards, donation, debt and equity. If you want to be taken seriously as a professional, I’d avoid donation-based platforms such as Go Fund Me. You need to adequately research the different crowdfunding sites so you understand which platform works best for your business.
- Commercial loan
This can cover everything from walking into your bank and asking for £10K to the more expensive options such as peer-to-peer lending. What type of commercial loan is right for you will really depend on where in its lifecycle your company is. Secured commercial loans can often be cheaper because the risk to the lender is minimised. Unsecured loans might be a more viable option for businesses without many tangible assets. A growing number of challenger banks and specialist lenders are making commercial loans more accessible for SMEs.
- Angel investors
If you’re after an investment of between £10K and £1m, Angel investment may be your best bet. Angel investors tend to be high net worth individuals who have had a successful business career themselves. As well as money, they can also bring technical or commercial expertise to your business, but the downside is that you’re going to give away capital.
- Venture capital
Venture capital is an extension of an angel investor and most appropriate for businesses that are looking to raise in the millions. Bear in mind that their job is to maximise their returns for their shareholders – something that means life with a VC involved can be cut-throat. Venture funding is most suitable for businesses having large up-front capital requirements that cannot be financed by debt or other alternatives. These characteristics usually best fit companies in high-tech industries.
So, to sum up, financing your business depends on its lifecycle and the correct matching of your needs against the finance available. It may involve a combination of more than one simultaneously or at different stages. You wouldn’t buy a house with a credit card and you wouldn’t buy a car with a mortgage.
For more information or to talk to us about appropriate finance for your business, please contact Haines Watts Partner Ryan Wilkinson – email@example.com
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