Financing your business – part 2

Things every business needs to know

Are you ready to grow?

If you are, then financing your business is an important part of this. 

There are several options available, and this is the second blog giving you an overview of what these are, so you’re informed and can start researching in more depth the right option for your business.

To recap, so far, we’ve looked at why you need to invest to grow, and how you can raise funds via loans and venture capitalists. 

But before you do…

Manage your working capital cycle

This is super simple and works by you reducing the length of time you give a customer to pay, while lengthening the time you need to pay suppliers. Before you consider the options below, consider this to create cash in your system. Be aware, however, that it only works in the short-term, and you can only do it once. 

Pitfalls are that some customers may not pay you on time, so you have a cost involved with chasing and collecting their payment. Plus your suppliers simply may not agree to longer payment terms. It’s simple quick fix though and that’s in your control and doesn’t give you lots of debt, so it’s worth considering.

Now, let’s press on and look at more options you have, to get that injection of funds to move your business forward.

Government investment schemes

The UK government runs two investment schemes:

·      EIS – The Enterprise Investment Scheme

·      SEIS – The Seed Enterprise Investment Scheme (for smaller companies)

These are like Venture Capital but are backed by the government and can be a good option for higher-risk start-up businesses and small and medium-sized enterprises. 

An investor buys shares and receives tax relief on their investment in the form of income tax relief on their purchase and on the capital gains tax relief at the point of sale (under specific conditions), which makes this an attractive investment opportunity. 

Competition can be high and the criteria strict for government backed loans. So again, take your time and do your research – this guidance information from the government will help you get started.

Joint ventures

This takes the form of partnership with another business and is usually part of a specific proposition or project you’re seeking investment for.

For example, a JV would be beneficial for a car company and an engine manufacturer to create an electric car. Keep in mind that the scope of your joint venture investment will be limited to the specific project you’re partnering on, so you can’t divert the funds elsewhere.

Share sale

If your company is limited or a plc you can sell shares. Remember though, if you sell more than 50% the person who buys will have the ‘controlling interest’ of your business and then gets to call all the shots! 

Shareholders will expect a dividend to be paid on the profits of your company. These might be paid at intervals during the year or as a single payment at year end. It is important to discuss the share structure with your accountant , as you may wish to pay different levels of dividend for different categories of shareholder.

It can be beneficial to have someone else with decision-making capabilities (e.g. in case you’re taken sick). However they may also want to be involved in major decisions for your business, so bear this in mind with who you sell your shares too. 

It is also important to have a shareholder agreement in place to make the rules for shareholders clear. For example, if you issue employee shares, what happens when the employee leaves the company.

Crowdfunding

There are three types of crowdfunding available – reward (or donation) crowdfunding, equity crowdfunding and debt crowdfunding.

Essentially with reward crowdfunding you ask a bunch of strangers to give you money for your project, in return for a gift (donation crowdfunding works the same way – only without the promise of a gift).

There are several crowdfunding platforms to choose from (think Kickstarter, Indiegogo and the like), and once you’ve made your choice, invest time in how you’re going to market to ensure you reach as many people as possible. 

Consider also what investors will get for their contribution. For example, if you want to make an album, anyone who gives more than £50 gets a signed copy. In the end you might receive a higher amount overall than you initially asked for, so decide how you’re going to handle that situation if it arises. 

Reward crowdfunding is super simple to set up and doesn’t create debt as a result, but keep in mind that this is a system that’s not regulated, so people are generally inclined to only invest a small amount or to invest with people they know.

Equity crowdfunding is similar but for those who are seeking substantially higher investments, and for this the investor receives an equity stake in your business. It is a regulated form of crowdfunding, so there is some protection for your investors. This is a particularly useful platform for biotech and innovation startups and could, in the future, see substantial financial rewards for the investor if the business really takes off.

Debt crowdfunding is a form of loan – and is also known as peer-to-peer lending. Your investors put their money in on the promise of getting it back in the future with interest. The longer they let you use it, the better the interest they would expect.

As you can now see there’s a number of different ways to finance your business – now it’s up to you to pick your option, do your due diligence with some thorough research and then off you go!

If you’re want to know more about raising funds for your business to grow would like some support, get in touch and ask our team for advice about which investment source will work best for you – we’re here to help!