By Richard Hopes, Partner at Alliotts Accountants
When you are starting out in business, it can be difficult to know where to go for funding especially in the early stages of growth. Richard Hopes, Partner at Alliotts, Chartered Accountants based in Guildford and London, specialises in working with tech start ups providing them with business and financial advice. Here he gives an overview and assessment of some of the key funding sources available for tech start ups.
“I talk to entrepreneurs and business owners every day so I understand the financial issues that tech businesses go through in their early stages. It can be a very lonely place when you start your business until you establish yourself and getting the right funding stream can be make or break. Some of the most common sources for funding that my clients have successfully gained are:
The Bank: Although banks are naturally cautious about investing in start ups, don’t assume that you won’t be successful. Banks can offer overdraft and loan facilities to companies with a strong credit record. However you will need good paperwork to back up your application — a well thought out business plan and financial projections. Some of the newer banks on the market offer benefits to entice small businesses including free business banking for an introductory period so they are certainly worth investigating.
Tech start ups be warned though - banks can be nervous about investing in technology as there is nothing tangible for them to take as security. Don’t be surprised if they show a preference for getting involved when the company is established, profitable, has asset cover and is producing a decent income stream.
Business Angels: By investing in your business, investors or business angels usually bring their knowledge and experience to a company to help to achieve success . In return they expect to get a return on their investment over a period of 3-8 years. Angel Investors will invest in early stage businesses but only if they feel that the entrepreneur or management team is up to the job and the product is strong. If you think that investment from an Angel investor may be the right answer for your business, you must be prepared to give up shares in your business and expect active involvement from your investor.
Government Grants and Tax incentives: The main tax incentive for tech businesses is the R & D tax credit . This is a form of tax relief for Research and Development (R & D) which is particularly beneficial for SMEs that are constantly innovating and developing new products. Originally, the amount of tax rebate was restricted to the amount of PAYE/National Insurance paid but this restriction has been removed. For SMEs who are looking to enhance their tax deductible expenditure (rather than claiming the rebate), the deduction for R & D spend was increased to 225% of expenditure from April 2012. This is a major incentive and well worth considering if you are constantly innovating your product range.
Crowdfunding: This is a worthwhile option to look at for funding if you are an early stage or startup. The concept of crowdfunding is that you pitch your idea to potential investors and, if they like what you are offering, they will contribute money to your venture. The people who invest are often given something in return, like the chance to get their hands on a new product first. This is what’s known as reward-based crowdfunding and certainly worth considering if you are a tech start up with a product to offer. Crowdfunding platforms will typically want to see a business plan and financial forecasts from you when you make your application, so it’s important you get these in order.
Peer to Peer lending is a fast and accessible way of getting a cash injection into your business if you are more established. The essential difference between this and investment crowdfunding is that you do not give away any equity, but rather pay interest on the money you borrow, much like you would with a bank. Peer-to-peer loans are usually funded by a number of different people. The downside of P2P lending is that supposedly less than 10% of loans applied for on these sites get funded. And you have to pay back the loans.
If you are a tech company and are looking to bring a product to market, then sources of funding are available but be aware that there and upsides and downsides to each. Take expert financial advice before diving in and making a decision you may regret.