Lots of businesses want to raise funds – but where do you go to find the money you need? There are more options than you probably realise – but you do need to do your research and prepare the right documents.
The very first step, before you think of approaching anyone is to identify whether you need equity or debt – or a combination.
All too often people think that they have to raise all of the money as equity. But, this has massive implications for dilution and for entrepreneurs’ it often prompts the wrong sorts of behaviours to be manifested. For example, aiming to raise the amount of money which doesn’t impact his/her shareholding, rather than what is required.
Most business owners forget the debt option; this doesn’t affect equity and can be a quicker and easier source of funds – enabling you to save time on the project of raising funds, and get on with running the business. A more open view about what is right for the company, rather than just the shareholder is an important consideration. Debt can be used to fund the growth just as well as equity can.
These days there are plenty of debt providers who will assist early stage business providing they have the right management and the right track record. For example, Funding Circle in the UK will consider lending to a company which has a two-year history. However, the traditional banks are no longer a good source of debt funding – you will definitely need to look other providers.
A combination of debt and equity is often the ideal solution, as this enables a cheaper cost of capital for the company, as the debt is entitled to interest rather than a dividend, making it less expensive for the company.
30% equity and 70% debt is good ratio and can make the company easier to manage. This is generally the accepted ratio which tax authorities and capital providers like to see. This usually makes the company more likely to attract further equity investment, as the potential shareholders can see that the management has understood that debt needs to be part of the company’s financing strategy.
Funding a start-up will always be the most challenging – but, depending on the scale of the ambition there are some institutions that will back raw start-ups with no less than an equity cheque for £100 million. For example, Sola Bank and Baldetton Capital. At the other end of the scale, in the £1–5 million area, there are lots of EIS/SEIS funds, VCT funds, and plenty of pools of EIS investors. This is where a firm such as ours can be helpful in providing introductions and knowledge of the market place. It can save a lot of time and help open the right doors, faster and more efficiently.
For smaller ambition companies there are plenty of Angel Investors – however they can be very difficult to find. The best place to start is by contacting the Angel networks. A Google search will throw up lots of results and then you need to dig into each one to see if you meet their criteria. There is often an up-front fee for being introduced to the Angels in the network – so be sure the Angels are right for you, and you for them, before you start. In some cases, the Angel Networks are sector specific.
Don’t ignore your own connections. Ask your network for recommendations and introductions – these are often the best investors and debt providers and they have come through a personal contact. Also, approach your family and friends. Although you may not hang out with millionaires and seasoned investors, people who know you are often more willing to invest in you – even if it’s a small amount. And these small amounts add up – and help give you seed that will attract a bigger fish later.
There are also other areas you can look into to raise funds – which you choose will depend on how much you are hoping to raise, whether debt or equity is best for your business or if, in reality, the real issue is cash flow. If your finance needs could be solved with improved cashflow consider invoice finance and leasing, rather than selling shares.
Crowdfunding is another option – but just because you put it out there doesn’t mean people will invest. You still need a robust business plan and you’ll need professional help in talking to investors and marketing the offering.
There are also a variety of small business grants available. These change all the time and many are dependent on your location. So, contacting your local business advice centre or Chamber of Commerce can help you track down grants that may be suitable. Check that you are eligible before applying; grant applications take time, so be sure you are right for them, and they are right for you, as they will often come with certain obligations.
Finally, it’s important to remember that fund raising is a combination of a sales project and a numbers game; you’re going to have sell the business to a lot of potential funders before you find the perfect match.
ABOUT THE AUTHOR
Clive Hyman FCA is founder of Hyman Capital Services offering expertise in due diligence and managing change in business including raising equity and debt capital, mergers and acquisitions, interim management, board management and governance, deal structuring, and company turnaround. See: www.hymancapital.com