Whether you are looking to grow your start-up or your company has been trading for a few years and is looking to expand, there are several funding options available to you.
A company typically requires the greatest amount of financing during its start-up and growth phases, but it may also require a cash injection for research and development, new equipment or inventory. While funding options for private companies are numerous, each choice comes with various stipulations.
Funding options generally fall into one of two categories – Debt or Equity.
Raising funds through debt involves an obligation on the business to repay the loan amount (plus interest) within a requisite period of time. Raising funds through debt allows you to retain ownership and control of your business.
On the other hand, raising funds through equity requires the dilution of your shareholding in your company to an outside investor in exchange for cash. Benefits can include gaining the investor’s expertise as well as money. Importantly, the cash does not usually have to be repaid until you sell the company.
Debt Funding Options
Bank Loans: Bank loans are ideal when the owner wants to retain full control of the company. A strong credit history and a sound business plan (including financial projections) will be needed in order to secure a bank loan for a new business. If you are successful, a bank is likely to want to take security over the business’ property and assets. Bank loans are typically repaid over three to five years at a fixed or variable rate of interest.
Invoice Financing: Invoice finance comes in two key forms: factoring and invoice discounting. For both, cash is immediately advanced to you when you raise an invoice. You can draw an agreed percentage of each invoice, with the balance, minus fees, paid on settlement. The difference between the two is that factoring provides an additional service of sales ledger and collection management.
Asset-Based Lending: This is a secured business loan where the borrower pledges their assets as security. The amount that can be raised depends on the perceived value of the assets and the likely rate of depreciation. It can often work well for asset-rich companies.
Equity Funding Options
Venture Capital: Venture capitalists provide finance to ambitious growth businesses in exchange for shares in the company. Typically, they help finance a major expansion strategy. The VC takes some of the risk, has a say in the company’s direction and usually seeks to exit in three to five years, often through a trade sale.
Crowdfunding: Equity crowdfunding will allow you to raise funds for your business by selling shares to the public, usually via an online platform.
Angel Investors: Angel investors tend to offer smaller sums at an earlier stage than venture capitalists. Angel investors tend to be individuals with a high net worth who invest in exchange for shares in the company. This can be beneficial as angel investors can provide vital knowledge in areas of management.
Grants: Grants can be made available by the government, the EU, local councils and charities. A grant would essentially mean ‘free money’ for your business. However, in order to be successful in obtaining a grant, your business will need to meet certain criteria of the grantor (for example, creating a certain number of jobs). In addition, due to the inherent benefits of a grant, they are highly competitive and the process of applying can be very time consuming.
R & D Tax Credits: R & D tax credits enable companies that incur costs in developing new products, processes or services to receive a cash payment or tax deduction.
Which option is best for you and your business?
The right funding option will depend on various factors including timescale, the stage of your company’s development, the amount of investment required and whether or not you are prepared to give up a percentage of your company to new investors.
Bringing on board a third party funder into your business is a big step. It is important to make the right choice and to know who to approach and how.