Every business needs some money to start up. Whether it’s cash to last you over the first few months, or major finance to invest in equipment, there will be money required. And unless you’re relying on your personal savings, you’ll need to find the finance elsewhere.
For most the obvious place to start will be the bank, for small business loans or overdrafts; but there are a number of other options open to you too. If you’re the right size, “Business Angels”, Private Equity Funds or Venture capitalists may wish to buy into your business, giving you cash in return for a stake. And, for smaller companies, Government grants may be available to help you, especially if you’re going to be an employer. If you are not sure where to start, Business Link has provided an interactive tool to help identify the right source of funding your business needs.
Venture Capital
If your business is new, then Venture capital might be another option for finding finance. Venture capitalists are specialist companies 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.
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.
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.
Friends and family
One final potential source of cash - and one which may be best left to a last resort - is friends and family. Obviously, friends and family can provide a highly-flexible source of funding, but there are many things to consider before you make them part of your business life in this way.
The key thing is to be upfront about the risks involved, and to make sure that everything is done in a business-like manner. If you have been turned down by everyone else, you are likely to feel quite desperate to get the funding you need.
But ask yourself this question: are you actually being totally honest with yourself and your potential investor about the potential risk? With a personal relationship at stake, honesty is vital if you’re going to make this work.
Secondly, and most important of all, make sure that you draw up a formal agreement between all parties. Setting down the terms of the loan in writing will avoid any potential for misunderstanding. Never, ever take a business loan on a word of mouth basis - especially not from friends or family. If you don’t want to involve a solicitor, Law Depot has a sample loan form you can use.
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