There are several sources of funding for your business, including:
- Angel investors
- Venture capitalists
- Equity finance
- Friends and family
- Government grants
- Commercial finance (loans)
- Find business partners
- Stage payments
- Banks
- Own funds
Some of these are self explanatory, so let’s look at sources of finance that might need more explaining.
Angel investors
A business angel is someone who quite often has a background in business or finance, and has funds to invest in businesses.
Typically they take a share in the business in return for their investment, and because of this tend to take more interest in the business, often using their experience and expertise to enhance the success of the concern they have invested in.
If the company needs a multi million pound investment, business angels is not the way to go as their investments are usually in the hundreds of thousands due to the fact that quite often they will be involved in more than one venture.
More on angel investing
- Top UK angel networks for your start-up
- Are angel syndicates the best route for start-up investment in Scotland?
Venture capitalists
Venture capital is finance provided for an equity stake in a potentially high growth company, and is behind some of the best know and most innovative businesses in the UK such as Pizza Express, Centre Parcs, Odeon, UCI cinemas and Spotify.
They tend to invest within three years of start up, in the early stage of development, and quite often choose areas such as:
- Clean technology
- Internet
- Digital media
- Life sciences
Quite often, their investment is to fund the development of new products and technologies. As well as cash, they will invest their expertise in making sure the project succeeds. Look at the case studies on a corporate finance website and you will very quickly get an idea of whether they are a good fit for your company. Questions to ask are: Have they been successful in securing funding in your sector? Are the funding amounts they have secured on behalf of clients similar to the amount you are asking for?
In Northern Ireland try NI Business Info for funding information and in Scotland Scottish Enterprise. In England a good starting point is your local regional development organisation.
More on venture capital backing
Equity finance
Equity finance involves raising capital for a business by selling shares of ownership to investors in exchange for funding. Unlike debt financing, which involves borrowing money that must be repaid with interest, equity financing does not require repayment. Instead, investors become partial owners of the business and share in its profits and losses. (N.B. Angels and VCs can also fall under this description although we have written about them separately here).
Equity finance is commonly used by startups and growing businesses seeking capital to scale operations or enter new markets.
Key aspects of equity finance include:
Investor Involvement: In exchange for their ownership stakes investors will often play a role in strategic decision-making.
Risk Sharing: Investors bear the risk of loss if the business does not perform well, but they also stand to gain from its success.
Long-term Capital: Compared to some other sources, equity finance can often provide longer term support.
Valuation and Negotiation: The valuation of the business and terms of equity investment are critical in negotiations to ensure fair terms for both parties.
Private equity companies are perhaps the clearest examples of this type of financing, and you can also count here sources such as crowdfunding, IPOs, and incubators and accelerators.
In the UK, there are two specific forms of tax relief that are often used by equity investors: The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
More on the equity financing route
Friends and family
Simple you would think, but this option can be full of problems. A relative could lend their life savings then worry about it afterwards, causing stress and friction between the parties involved. The lender might not agree with the way the business is being run and try to interfere, more stress and friction. It is nothing unusual for families and friendships to be split over money. A proper loan agreement, or investment plan, should be put in place and all parties should adhere to it, then hopefully arguments and upsets will be avoided.
More on securing money from family and friends
- Friends and family or venture capital?
- Build Back Better #2 – replacing friends and family with external investors
Government grants
Grants from the UK government are not repayable, but there is a lot of competition for them and they are almost always awarded for a specific purpose or project, such as the development of a new product or service. For grant information try UK Grants.
Government grants for UK businesses are always being updated. You can find the list of current available national and regional grants here.
You can receive grants for the following reasons:
- Innovation and business growth
- Boost regional economy
- Reduce energy costs or save energy
- Create more jobs
- To help new regional businesses
- Reduce carbon emissions
- Innovate services for space
- For high-speed broadband connection
- Buy specialist equipment
- Building repair and conservation
There are advantages and disadvantages, as with any finance deal, and some of these are:
- The grant will not have to be paid back
- No control is taken over the business
- No part of the business is taken in return for the grant
- There are a lot of different types of grants and the correct one for the project needs to be found
- There is a lot of competition for the grants
- The business would generally be expected to match the amount of the grant from its own funds
- Usually, they are awarded for proposed projects not ones that have already started
- The application process can be very time consuming
More on government sources of finance for business:
- 10 Business Grants for UK Start Ups and Growth Businesses
- The Scottish Growth Scheme – Five funds offering microfinance and loans for Scottish-based companies
Commercial finance
Commercial loans can be an effective way of purchasing a business as you can usually have the repayments spread over a long term, maybe 20 years, although they will normally require some sort of security.
More on commercial borrowing
Find business partners
Like with family and friends business partnerships can have too much conflict to succeed. If this is the way forward for the business, each partner should have a definite roll to play, each using their own strengths and recognising their weaknesses so that they can compliment one another. Then the partnership might succeed.
Stage payments
If you do not have the full amount needed sometimes the vendor will accept stage payments, – payments after the initial one to be made from future profits of the business.
Any vendor that agrees to this must have great confidence in the business continuing to thrive, which bodes well. The main disadvantage is that agreements of this type usually include a clause that says if the payments are in default, the vendor takes back the business at no cost to himself or herself.
This does mean the schedule of payments could be halfway through before this happens, and the vendor reclaims the business.
We have discussed some of the ways to finance a business purchased, it needs to be decided which is the best method for the business involved. This can be a time consuming process, but it is well worth the effort to get it right first time.
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