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Raising Finance For Your Company
There are three broad ways that businesses raise money.
New businesses often raise debt finance to start or grow thir business. It usually involves borrowing money from a lender that you promise to pay back with interest.
The good thing about debt finance is that you don't have to give up any ownership of your business, as you would with equity financing. However, you are committed to making regular repayments, which brings additional risk.
Debt is a significant obligation, and the most common forms for startups include:
- Startup Loans - in addition to ordinary personal loans, lenders like the British Business Bank offer government-backed startup loans. Unfortunately, such loans often require personal guarantees which are not ideal if things don't work out.
- Asset Financing - where an asset (like a food truck or coffee roaster) is used as collateral, which may reduce the interest rate and personal risk.
- Merchant Cash Advances - existing businesses might be able to borrow against future cash receipts from their merchant service provider or payment processor. It might be a little more expensive in terms of the overall interest you'll pay, but it may help to reduce risk.
Equity financing involves selling part of your business, in the form of shares, to investors in exchange for money. This can be an attractive route for startups because, unlike debt, there's no obligation to repay the funds.
In theory, investors provide the money in the hope that the business will be successful and they'll earn a return on their investment. But in reality, many startup investors are friends and family of the founder(s) - willing to take a risk without always fully understanding the financial risk.
Truly financially-motivated startup investors will only invest in businesses with the potential to generate a massive return on investment. A common benchmark is to aim for a return that's at least ten times (10x) the amount of the original capital provided.
If you go down the equity route you should also look into the SEIS scheme. It is a very generous tax-efficient UK scheme that may make investing in your business more attractive. We partner with SeedLegals to help you through the process.
There are ways to raise money without debt or equity but they involve a mixture of marketing and a healthy dose of luck.
- Crowdfunding - websites like Kickstarter or GoFundMe allow businesses to raise small amounts of money from a large number of people. This can be an effective way to raise money but it's super-competitive. We've seen clients raise £10k-£80k though it helps to have a large and receptive personal network.
- Grants - there may be grants available for you so it's worth searching online. Grants are usually allocated to specific areas or disadvantaged demographic groups.
We'll also mention one last concept that is important to keep in mind after you raise money.
Bootstrapping - when a founder starts a business with little capital, using money from personal income and savings, and by operating at the lowest possible cost.
Bootstrapping is easy to forget when you have a large pile of cash in your bank account. But it's almost always a good idea to operate at your lowest possible cost. By saving money, you'll have more free cash flow to repay founders, investors, and double down on your own growth.