From Starting the Engine to Taking Off...

05 November 2014

Practice Area: Commercial Law
Sector: Technology

R_nevin

..An Overview of Financial Alternatives Available to Help Get Your Start-Up Business Off the Ground

Raising capital is one of the most challenging aspects of growing a business.  If the old saying “you have to spend money to make money” is ringing true for you, then the good news is that there are a number of funding options out there. Here are 7 to consider:

1.  Savings

Your first source of capital is likely to be a loan from yourself.  The advantages are obvious – you retain 100% ownership and control. The main risk – you place your own assets on the line if your venture fails.  It’s wise therefore to carefully and realistically evaluate the risks your business carries before investing your own money. 

2.  Family and friends

If you are getting a cold shoulder from external funders, you might consider borrowing from willing family or friends.  Take a cautious approach - whilst the thought of having informal terms and zero interest sounds appealing, it is wise to formalise the relationship just like any other loan and clearly document the terms upon which the loan is to be provided and repaid. Avoid putting your relationships at stake by ensuring that those close to you have every opportunity to carry out their own due diligence on your venture and understand the risks involved, including the worst case scenario.

3.  Bank loans

This option is worth exploring if you have security to borrow against and you are able to find a willing lender.  Depending on your specific circumstances and the risks attached to your business, lenders may be prepared to accept flexible repayment terms.  The drawback is of course that interest will accrue and be repayable, so it is worth researching the market for terms and rates which suit you and your company.

Banks are often willing to offer fee-free overdrafts to a certain limit, which is a good way of funding working capital.  The downsides are that the rates attached may be unfavourable and exceeding your overdraft limit is likely to incur hefty bank charges and higher interest rates.

4.  Angel investors

Angels are typically high net worth individuals looking for investment opportunities, usually in return for either convertible debt or equity. One of the advantages of raising money from angels is that generally, angels will be focused on helping the business succeed by sharing not only their money, but also their industry expertise.  This means however that they are likely to want a say in major decisions.  It is crucial therefore to be selective and consider your potential angel’s investment history and operational experience and assess whether their skills and contacts will be of benefit to your business.  Click here for more on what to consider before choosing your angel investor.

5.  Venture capital

VC funding is likely to be attractive if you require large amounts of capital not obtainable through bank loans.  In exchange however for the higher risk assumed by VCs by investing at an early stage, they usually demand a level of control over company decisions, both at board and shareholder level.   Do your research and find out which VCs have funded similar projects to yours.  Check what the timeframe will be for the return on investment.  Ask yourself what (if anything) you can expect to receive from a potential VC in addition to capital, for example, media exposure, follow on capital or access to expertise.

6.  Crowd funding

Crowd funding is an increasingly popular alternative to bank lending and is a way of raising finance by gathering smaller amounts from a larger number of people (usually in return for equity or debt).  It’s a good way to test your project directly with a wider audience and prove to angels/VCs that your project has attracted interest.  The modern form of online crowd funding allows companies to source funds through a crowd funding ‘platform’ which hosts the funding pitch and collects the money.  There are lots of sites to choose from and there can be fundamental differences in the services provided by many platforms, so consider your options carefully to understand which platform is the best to use depending on your project and target audience.

7.  Grant funding

It’s worthwhile finding out if you can get help from government-backed support schemes or other forms of grant funding to test and develop your project.  These schemes tend not to require repayment, nor will they charge interest or demand control.  As you might expect however, competition for funding can be fierce and the application process time-consuming.  Also, the grant may cover only part of the cost of a project, requiring you to fund the remainder.  To get you started, www.gov.uk contains a useful database of schemes available to assist new business (by way of funding support and/or access to advisory services) listed by reference to location and the type of project.

And finally...

Plan carefully.  Keep your business plan under review – work out exactly how much money you need and how it will be applied.  Whatever source of funding is appropriate will depend on the circumstances and maturity of your business, so make sure to research properly the various options available before pressing the green light on any particular one.

For more information please contact Rebekah Nevin.

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