By Luke Lang
Whether you're starting a new business or looking to expand an existing one, the task of securing investment is notoriously difficult. Banks tend to adopt a no-risk approach to lending and venture capital funding can be hard to access.
Deciding which source of finance is appropriate to bridge the funding gap is made even more difficult in the current economic climate. As well as the more traditional routes to funding there are some innovative new ways that entrepreneurs can use to raise capital. Luke Lang, Co-Founder and Marketing Director of Crowdcube, an equity based crowdfunding platform for start-up and small businesses, outline the most common options below.
Commercial loans from banks are available to most small businesses and start-ups, subject to status. As with a personal loan, your business will borrow money and repay it over a pre-agreed number of months or years, at a fixed or variable interest rate.
Borrowing money from a bank to finance your business can be a lot harder than getting a loan to buy a new car however. Banks have stringent rules around awarding a business a loan, which have become even more rigorous as a result of the credit crunch.
Since the start of the economic crisis, many businesses have found it harder to source funding from banks, and have found interest rates on loans and overdrafts have risen sharply in many cases. However, with increased pressure from the new coalition government on banks to lend more, conditions should hopefully start to improve. It will be interesting to see if the loan equity agreed by the Government increases loans given to start-up businesses or just small businesses. The typical investment amount is between £10,000 and £250,000.
2. Business Angels
Business Angels invest in high growth businesses in exchange for equity in the business. It is commonplace for Business Angels to operate as part of a network, which is often regionalised. Angels look for scalable companies with a unique selling point, in niche markets.
Tracking down the right Business Angel that is willing to invest in your business can be challenging and can take longer than you might hope. However, the good news is that once you find the right Business Angel they tend to make decisions quickly. The typical investment amount ranges between £25,000 and £500,000.
The web-based notion of ‘crowdfunding’ is set to become a highly successful method of raising cash for entrepreneurs. Crowdfunding allows entrepreneurs to showcase their business opportunity online using a Dragons’ Den style video pitch to attract investment.
This pioneering new way of raising finance challenges conventional funding models by turning ordinary people into investors who can pool small amounts of money (as little as £10) in support of an idea, person or business. There are two key ways this works. A number of crowdfunding sites such as Kickstarter.com or Crowdfunder.co.uk provide people with personalised rewards in return for their contributions. A newer and revolutionary approach went live this week at our Crowdcube.com site. This provides investors with equity, shares in businesses they invest in.
Crowdfunding enables entrepreneurs to promote their investment opportunity and more easily attract and manage investment from friends, family, suppliers, customers and special interest groups and other online communities. The typical investment amount, between £10,000 and £150,000, is made up of smaller contributions from more people.
Grants involve securing a sum of money given to a business for a specific project or purpose. The grant often only covers part of the total costs for the project. However, as long as you keep to the terms and conditions of the grant, you won’t have to repay it or give up shares in your business.
Securing government grants has become more challenging since the coalition government’s budget cuts. Regional Development Agencies (RDAs), who were previously a good source of grants, are planned to be abolished and NESTA (National Endowment for Science, Technology and the Arts) will have to become independent to continue its good work. The Princes Trust has proved to be very popular offering practical and financial support for young people to start-up in business.
There are a multitude of grants available, typically ranging between £500 to £100,000. Your local council will be able to provide further information.
5. Venture Capital (VC)
A Venture Capital firm’s investment is received as shares (or equity) rather than as a loan. Generally the investor requires a higher "rate of return" to compensate him for his additional risk.
Venture Capital firms target businesses with potential for ‘rapid growth’ rather than their current size or longer-term potential. A company must usually demonstrate that they will be able to deliver a significant growth in turnover within five years to gain the attention of a VC firm. Venture capital investors tend to be most interested in companies that are managed by experienced and ambitious teams who are capable of turning their business plan into reality. The typical investment amount is over £250,000.
Luke Lang ran a marketing consultancy specialising in business-to-business and digital marketing before co-founding Crowdcube PLC in 2010.