If your business is growing - and even if it isn't - you might be thinking of finance. Here's an introduction to your business funding options.
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Business owners and entrepreneurs often have external finance raising on the mind – it’s an important part of business plans, and often a necessary one.
It could be that you need to place a large order, make an investment in new facilities or equipment, add new team members or experienced professionals, or even fund an acquisition. Or you could simply need more working capital to utilise.
But how should you source this finance, what should you expect from the process, how much will you actually need, and most importantly, when should you simply say “no”?
Debt or Equity?
You can raise money in different ways but most businesses go down one of two routes – debt or equity.
Debt enables you to retain ownership of your company, but requires repayments and accrues interest as you pay back the debt.
Equity, on the other hand, generally means giving shares in your company for money. You usually don’t have to pay interest on the money, or pay it back at a specific time.
Rather, the investor will own a section of your company, and will expect a share of any returns should it be sold, or of any dividends paid if the company makes enough profit. The investor will share in the business’ successes, as well as the results of any under-performance.
Equity funding means giving away a slice of your business
It is recommended, when looking for finance externally, that you think cautiously about the amount you believe you require.
Overestimate and you may pay interest on money that you don’t require or give away more equity than required; equally, underestimate and you may need to raise more money at short notice, against a backdrop of changing market conditions.
It’s a good idea to plan for any over-runs or contingencies that you may incur. Another area that often goes overlooked is the additional working capital businesses need in order to grow.
This finance ought to be factored into your considerations for finance. Some lenders or investors may agree to provide the funding in tranches, so that you draw down the money (and, with equity, issue the shares) as you need it.
Ahead of deciding the type of investment you’d like to take, it is worth giving thought to your future plans for the business, including whether you eventually hope or expect to sell it. The effects of investment on their businesses can surprise some business owners who are new to fundraising.
For example, will you have to deliver regular reports to your equity investor? Do they expect to put a director onto your board, or indeed to have power of veto over key decisions? How do they fit with your business in terms of personality? Do you think that you could work with them closely, with an aligned vision for the business?
From the point of view of growth, the benefits of investment can be wide-ranging: giving access to new markets and customers that might have been out of reach previously, the ability to exploit additional financial and marketing experience, and even potentially speeding up the development of products.
In our work for entrepreneurs and investors, although the legal and financial due diligence issues are important, the focus tends to land more on differences and commonalities in the business expectations of the two parties.
Successful investments often come down to personalities
It often isn’t easy to separate from your equity investor, so make sure to take your time and get to know them properly before you go ahead and accept them. It will be worthwhile asking questions about how they manage their portfolio, and talking to their other investee companies.
This can help you to establish whether the person negotiating the deal with you is the same person who will be attending your board meetings every month.
Taking a risk on crowdfunding
Crowdfunding can be an exciting way to combine raising the profile of your business with raising actual investment for it. In an ideal scenario you will gain a massive new base of investors, all of whom are necessarily interested in your product and company, and who can often help to increase your market through word of mouth.
These fresh investors may also be your earliest customers; they can therefore help to identify the desires of your customers and spark discussions in your user community. Furthermore, you gain a diversified shareholder base who are likely to be more passive as investors, although probably no less vocal about your performance.
In successful scenarios, crowdfunding can be hugely beneficial, for example, Brewdog, which rewarded its 2010 investors with an eventual 2,800% return. Of course, there have been instances when crowdfunding has backfired, as the developers of mini-drone Zano found.
When planning for funding the key advice is to do your research, and begin the process of fundraising with plenty of time to spare, so that you can explore all available routes without undue pressure.
Keeping an eye on your goal, whether it be to maintain growth, to exit, IPO or another objective, can help define the best path forward for you. A bad deal can indeed be worse than no deal at all, in the long term, so remember that it’s always an option to decline funding if the personalities don’t fit, or the terms aren’t quite right.