Your business is doing well, but needs money to take it to the next level. Or you have a sound business, but are going through a tough patch - and need investment to see you through. Not that long ago, the easiest option would have been to go along to the bank and get a business loan, but thanks to the credit crunch and uncertainty over the economy that may not be as easy as it once was.
However, there are sources of money which don’t involve the bank, and in tough times they can be better options than saddling your company with massive debts. Angel investors, private equity and venture capitalists may wish to buy into your business, giving you cash in return for a stake. Government grants are available to help you, especially if you’re expanding. And never forget the possibility of friends and family helping you through tough times.
Private “Angel” investors
Angel investors - or “business angels” - are wealthy individuals who invest in a company in return for a percentage of the equity - think “Dragon’s den” with slightly less combative investors! Quite often, the investment will involve not just money, but also time - angels are often experienced business people who can bring their knowledge to the management of the company too.
The pros of angel investors are that they tend to be more amenable to helping businesses in trouble than a bank might be. However, you can expect to give up a stake in your company - which means you will receive less if you ever want to sell it, and you may need to pay dividends to your new shareholders - and they may want you to take a back seat in how the company is run. Under some circumstances, an angel might want you to step away from day-to-day management completely and bring in their own team - which could be a huge wrench for someone intent on running their own business.
Arguably the best way of finding an angel investor is word of mouth. Using existing business contacts means you will find someone who is at least familiar with the business and with you. However, if you need to find an angel, then online can be a good place to start - sites like the UK Angel Investment Network or Angel’s Den connect angels with small companies needing finance.
Venture capitalists
If your business is relatively new, then venture capital might be another option for finding finance. Venture capitalists are firms which invest in other companies in return for equity, as either a long or short term investment. Typically, they will look to sell their stake and realise high profits within three to ten years, which means they tend to be attracted to newer companies which offer high potential early growth. New companies often go through multiple rounds of venture investment, diluting the original founders’ shares but providing the funding for several early years.
Venture capitalists are unlikely to be interested in investing in you if you have an established business which has low growth potential. But if you are planning to expand rapidly, even if you are not a brand new company, they may be interested.
While venture capitalists usually want at least one seat on the board of directors, they are generally more “hands off” than angels, and aren’t usually looking to run the business themselves. Private equity firms, on the other hand, are more likely to invest in established businesses - again, as a short or long term investment - but are more likely to want a change of management.
For finding out more about VC or private equity funding, and for help with looking for a potential investor, the British Private Equity and Venture Capital Association is a good place to start.
Leasing
If you’re looking for investment in order to acquire new equipment, consider leasing before you buy. Leasing new equipment over a short term can be a good idea if you’re not sure how long you will need it, or if it’s required for a short term project. However, note that if you lease equipment rather than buying it, it can have implications for your tax as you may not be able to write down the investment or have it form part of your Capital Allowance.
Government grants
Grants are one-off payments by a government body, made to businesses undertaking specific projects or towards an area of their business. Local authorities, central government and the European Union are all potential sources of grants. They can be extremely attractive to businesses, because by and large they never have to be repaid and as long as the money is used for the intended purpose come with few strings attached.
There are many grants available - Business Link currently lists over 2,000 potential sources of grant funding for small businesses. However, this means that navigating them and finding the right one for you can be extremely difficult. They are also usually not something that can be got quickly, which means that they tend not to be useful for short-term emergencies.
However, Business Link has produced an interactive web page which will walk you through finding an appropriate grant depending on the purpose you need to put the money to. For more detailed information, contact your local Business Link directly - they can help with the paperwork for the applications process. You can find your local Business Link here.
The Small Firms Loan Guarantee scheme
If you want to borrow up to £250,000 and are having difficulty persuading the bank to lend you the money, one option is to look to the government’s Small Firms Loan Guarantee scheme. This is a scheme by which the government will act as a guarantor on a loan, as long as you meet certain criteria, in return for an additional premium of 2% per annum on top of the agreed loan rate.
You need to have been trading for less than five years, and be under a certain size (currently less than £5.6 million annual turnover), but this can be a very good option for a short term loan when you are having problems raising the money in other ways.
Back to top