A new business venture has been born. You have your killer idea, you have done your research and are putting the finishing touches to your business plan, but what’s next? Every successful venture needs some financial backing to get it off the ground. How do you go about securing that much needed business funding and how do you know which is the best option for you?
There are various ways you can go about this and you may need to combine multiple approaches to enable you to launch. From business bank loans and startup grants to angel investors, here are some realistic ideas for consideration that can enable you to get you off the ground.
Raiding the piggy bank might not produce the capital you require but having a look at your own personal funds is a good place to start. It’s also a good way to test whether you truly believe that your new venture has prospects. Conduct a full personal financial review to assess your position. You may have funds that you have set aside intended for other purposes but that you can re-consider as investment in the business. Do you have any shares that you could cash in for example, or can you get a better deal on your mortgage to free up some capital?
Self-funding is more beneficial than you may realise as it allows you to have full control over your business and mould it the way you want to. It also demonstrates that you have complete faith in your venture which will in turn attract any future investors. If you are willing to invest your own assets then they are more likely to invest in you.
Family and Friends
Raising capital from within your immediate network might be a sensible option. Those who know you well are more likely to trust your business vision and are also have confidence in you that you will deliver on expectations. With interest rates so low in the UK this option is mutually beneficial. You can repay the loan with an interest rate that is higher than they would receive from that cash sitting in the bank. This rate will still be lower than you would have to pay the bank borrowing the money directly from them.
In addition, you can agree other terms and conditions that are specific to your requirements. For example how much the loan will be, when it needs to be repaid and the repayment terms such as frequency of payments. It is advisable to formalise any loan agreements with a written contract. Having the agreement in writing will formalise the details and allow for clarity on both sides.
A Promissory Note is a simple contract that records the terms of a small loan in place of a complex loan agreement. It should include the amount of money to be loaned, any interest rates that are to be applied, repayment terms and the date when full repayment of the loan is to be made
Small Business or Startup Bank Loan
A bank loan obviously comes with the added cost of an interest rate. These vary considerably and can be very high so you will need to do some research. The advantage is that it allows you to keep ownership of your business without having to give any shares away to investors.
The biggest banks in the UK all have specialised services for small businesses. The process for applying for a loan can be long and tedious and you are likely to have to offer up personal assets as security. It is vital to ensure that you don’t borrow too much capital in proportion to your equity. Ensure you have a realistic and convincing business plan drawn up before you embark on securing a loan.
The UK Government has pledged to help SMEs through the stages of start-up and growth and now there is a range of funding for small businesses to take advantage of. Use the government’s Business Finance Support Finder which allows you to search for funding opportunities based on the location, size and type of business you run.
One option is to apply for a government backed Startup grant. This is a loan of between £500 and £25,000 specifically intended to start or grow your business. Unlike a business loan, this is an unsecured personal loan. In addition you will get free support and guidance to help write your business plan, and successful applicants also get up to 12 months of free mentoring.
An individual angel investor is usually themselves an entrepreneur who is looking to invest their spare assets into a startup. The advantage of bringing an angel investor on board is that they will not only contribute substantial funds to your business, but also be able to share their experience and access to resources that will guide you towards growth.
You can rely on an angel investor to act as your business coach as they obviously have a vested interest in the success of your venture. You can sense check new ideas and business developments. An angel investor will also usually be able to open doors for you via their large business network.
The downside is that you will have to surrender a significant percentage of control as your investor will require a share of the business in return for their investment. You may also be under significant pressure to deliver your business projections to ensure your angel receives the value they expect.
Related reading: Angel investors vs venture capitalists
When you do get the backing of an investor you will need ensure the correct and relevant legal documentation is in place in order to protect all parties involved.
You may want to issue a convertible note to your investor. This is a form of short-term debt that converts into equity. So the investor would be loaning money to your startup and instead of a return in the form of interest, the investor would receive equity in the company. A Convertible Note Certificate is a certificate that evidences the investor’s title to the convertible note. It is issued after due payment of investment amount by an investor.
A Simple Agreement for Future Equity (SAFE) is a contract by which an investor makes a cash investment into a company in return for the rights to subscribe for new shares in the future. Contrary to a convertible note, a SAFE does not carry interest, does not expire, and does not specify a minimum amount of investment that the investor will make.
A Seed Investment Agreement (Ordinary Shares) is a contract by which funds are raised by issuing new ordinary shares to new investors. Raising funds by a Seed Investment Agreement is simple and direct. The new investors have the same class of shares as the founders and therefore have equal rights.
As the name suggests, an incubator is a company that protects and nurtures a fledgling business enabling it to develop and grow. An incubator can offer training, guidance, networks, capital and coworking spaces. Utilising an incubator will also give you credibility with respect to any future investors.
There are some alternatives to traditional ways of raising investment that are gaining in popularity. Funding Circle for example is a peer-to-peer lending marketplace that allows investors to lend money directly to small and medium-sized businesses.
Related reading: When should your startup consider crowdfunding?
Lastly, have you considered Crowdfunding? Essentially this involves encouraging people to club together to fund a new project or venture. You will need to raise many small amounts of cash from a large number of people typically via the Internet. Propose your business venture to the masses and if it’s popular enough you can raise the necessary capital to get it off the ground. You will need to offer some sort of incentive though to attract investors and remember, it’s not the done thing to attempt to crowdfund for a vacation or a new sports car!
Zegal can assist you with the necessary documentation when raising finance for a business venture: