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Archive for April, 2013

Equity finance

Equity finance is the next funding source.

This is where an investor or a group of investors take a share of the business in return for an investment.

We will look at three types of Equity Funding:

  • Business Angels
  • Crowd Funding
  • Venture Capital

 

A business angel can be an acquaintance, a former employer or someone you’ve found through a Business Angle’s network.

A useful Website is https://www.ukbusinessangelsassociation.org.uk/

Angels are wealthy individuals who invest in start-up and growing businesses. The investment can involve time as well as money, depending upon the investor.

Research by the British Business Angels Association estimates roughly £800m is invested every year. They reviewed 1,080 angel investments and found:

  • Angels lost money in 56% of deals
  • 9% of the deals generated more than 10 times the capital invested
  • The average rate of return for successful deals was 22%

 

Angels typically invest between £10,000 and £750,000. On average, business angels in the UK invest £42,000, and each investor makes around six investments.

As well as cash, business angels can offer years of experience in the business world, not to mention useful contacts to help you grow your business, which can add real value to your business.

Depending on the business it can be best to have many investors. An example could be a restaurant. This is because the investors become customers and promoters for the business.

Schemes have been set-up by the Government to encourage investment into start-up and small businesses. An example is the Seed Enterprise Investment Scheme.

Investors get tax relief of 50% of investments of up to £100,000 per annum plus gains are not taxed.
The pros of a Business Angle are:

  • Angel investors can often make quick decisions
  • Good for early stage investment
  • Business angles can bring knowledge and contacts to the business

 

The cons of Equity Funding are:

  •  You will need to give up a share of the business
  • The Angel may want to be involved in the business and have strong personalities

 

Next is Crowd funding.

This is where a group of people come together to fund a business, each investing a small amount.

Examples of crowd funding sites are as Kickstarter.com and Crowdcube.com

The pros of Crowd Funding are:

  • The investors do not get directly involved running of the business.
  • You gain a large audience to begin with. It could be that you have 10,000 customers when launching. Investors in your venture are also fans of your business and will help evangelize your start-up adding ‘word of mouth’ marketing as an added benefit.

 

The cons of Crowd Funding are:

  • Not suitable for very large capital intensive funding requirements beyond £1million or so and also for start-ups looking towards expanding in the growth stage through capital injection.
  • You need to sell your idea and convince more than one investor in order to reach your target funding amount and it’s not a matter of getting one person to sign a check so campaigning is important in the process.

 

Next we will consider Venture Capital.

You’ll be hard pressed to find a venture capital or private equity company willing to invest if you’re pre-revenue or very early stage these days. They’re also not really interested in small amounts of cash – you’ve got to be looking for several million before they start to take notice.

Private equity backed businesses are among the fastest growing small businesses in the UK.

Research revealed that while most businesses took longer than originally expected to secure investment, once they received the funding, revenues grew at a much faster rate than the economy as a whole.

The most effective way of raising venture capital is to select just a few firms to target with your business proposition. The stage your company is in, the industry sector in which your business operates, the amount of finance needed and the geographical location of your business all factor in the mix.

To find the right investor a good place to start is British Venture Capital Association (BVCA) from across the UK.

For companies that are beyond the product development stage and want to initiate early stage commercial manufacturing and sales, or expand a business, a substantially larger investment may be needed.

Early-stage financing can be around £500,000; expansion financing around £1 million and management buy-outs and buy-ins around £5 million.

The process for investment whether the amount sought is £500,000 or £10 million is the same. A similar amount of time and effort is required by the venture capital firms appraising the business proposal prior to investment.

For this reason, medium-sized to larger investments are more attractive for venture capital investment, as the total size of the return, rather than the percentage, is likely to be greater than with smaller investments.

The pros of Venture Capital finance are:

  • This is more suitable for larger amounts of capital.
  • Venture Capital firms will take a more active involvement with the management of the business playing a pivotal role in setting targets, milestones as well as advice on how to get there since returns on their investment is a primary lookout for them.

 

The cons of Venture Capital finance are:

  •  Not likely to entertain smaller investments
  • The business aims can be severely influenced by Venture Capital investors who can look for short-term wins.
  • There is a major loss of control

 

So, that brings me to the end of the posts on business funding.

We have covered the 12 key strategies for raising money for your business.

The chances are what will be right for you will be a mixture of different sources of finance.

We hope you found this presentation useful and you now know more about funding options.

Just remember; do research before you invest your money or anyone else’s. And, test small before you bet the business!

Grants

Grants are the next source of funding we will consider.

There are literally thousands of different types of business grants available.

One of the hardest things is finding them, and getting through the application process, which can be long and arduous.

However, if you or your business qualifies, they can provide the financial impetus your idea needs to either get off the ground or grow into something bigger and better.

All publicly funded schemes are designed to encourage new and growing businesses, to bring wealth and ultimately create jobs. To help achieve this, the government makes available a portion of taxpayers’ money to help and encourage enterprise.

This cash gets distributed through a variety of ministries, departments, agencies and organisations both on a national and local basis. Even universities can also provide match funding for research and development grants.

The good news is that most businesses are eligible at any one time to apply for a number of different business start-up grants and support schemes which are distributed in a wide variety of forms.

It is just not possible to say exactly how many grants schemes there are out there. For example, the Enterprise Advisory Service’s main database usually contains over 3,000 open at any time not including those offered by local authorities.

Useful Websites are www.j4bgrants.co.uk and https://www.gov.uk/business-finance-support-finder

The key pro of Grant Funding is that it is free money that doesn’t need to be repaid.

The cons of Grant Funding are:

  • It takes time for grants to processed, ranging from months to a year
  • There may be additional requirements on your business. For example, helping the community or society in general
  • Ongoing additional documentation maybe required

Asset funding

Asset Finance allows you to borrow against assets owned by the business.

Leasing arrangements are essentially rental agreements with the finance company. However, it may not be for the full amount that the equipment costs.

This works in two ways; the lender either buys an asset from you and you rent it back or you borrow against your asset but are still allowed to use it.

The pros of Assets Finance are:

  •  It is quick
  • Does not involve outside investors

 

The con of Asset Finance is:

  •  The amounts are likely to be small for a small business

Factoring and Invoice Discounting

Factoring is a flexible form of loan, which advances money to a company as it issues new invoices.

This is different to overdrafts or more formal loans, which are usually for a fixed amount.

When you enter into a contract with a factoring company, the factor agrees to control of your invoices, in return for a small fee.

When the factor assumes control of an invoice, they will advance you a percentage of its total value – usually between 70 and 90% of the invoice. They will then take responsibility for ensuring the invoice gets paid; once the money’s in, they’ll pay you the balance due, less their fees and charges.

Factors’ requirements vary from company to company. Some will consider start-ups but typically the company must be operating on a business to business basis and have a turnover of £50,000 or higher.

It is possible to factor key customers and draw down money on individual invoices.

Invoice Discounting is a variation on factoring where the lender still advances money on a business’ invoice but, instead of the lender collecting the debts for the business, the business collects its own debts.

Invoice Discounting facilities are normally made available to established businesses with turnovers in excess of £250,000 which have good systems in place to ensure reliable collections from their customers.

The pros of Factoring and Invoice Discounting are:

Access to an ongoing supply of cash that grows as your sales grow

Benefit from improved profitability as you can pay suppliers earlier, buy in larger quantities and take advantage of any volume discounts available

The cons of Factoring and Invoice Discounting are:

  • Credit limits will be set for customers which may affect the way you trade
  • Exiting the agreement can be difficult
  • Disputed invoices must be dealt with quickly to avoid them being re-coursed
  • In the case of factoring, you are reliant on the factor to collect the debt in a timely and efficient manne