Getting access to funds can be the difference between feeling the strain and planning for your long term success.
Your most important role as a business owner is managing risks. The biggest risk to your business is cash flow (also known as liquidity).
It can be tiring hearing the “Cash is King” mantra, but we have to accept it is true. Your business success will hinge on the cash you have access to.
If you need external support, choosing the right form of investment is as big a decision as the amount you need.
The general rule for choosing which form of funding is most suitable is generally based on the length of time you require access to the funds.
So where could you get access to cash from? Let me run you through your options from Long-Term funds to Short-Term unashamed purchases.
First, Let’s Look At Grants.
Grants are non-repayable funds, usually provided by government-connected (or funded) organisations.
It’s the non-repayable aspect that catches people’s attention and rightly so.
Starting locally – to Dorset – both Dorset Growth Hub and Silicon South may be able to support you and your efforts.
Dorset Growth Hub (or DGH) has launched Small Growth Grants for ambitious businesses in Dorset.
Applicants need to demonstrate they have traded successfully for at least 12 months and now have plans for a project that will facilitate business growth. I am told this is a very competitive application process so you will need to be able to communicate “why you”, well.
Silicon South also provides an abundance of business help. They can offer grants of up to £2,000 to businesses in the digital, creative and technology sectors thanks to the European Regional Development Fund. These are 25% match-funded grants for Dorset businesses. So a Grant of £2k means you spend £8k.
You must have been trading for at least 12 months and be able to spend the grant within six months. Although the second part shouldn’t be an obstacle.
Very similar to all grants, ALL project costs must be started AFTER the panel approve your application.
Both DGH and Silicon South offer 1-2-1 support with the process so be sure to contact them before starting with your application.
If you require more, Innovate UK can perhaps help.
Most government grants are awarded through Innovate UK, which is part of UK Research and Innovation. They were established by the UK government to drive economic growth by enabling and supporting innovation. They award grants through several different competitions, all with their own deadlines.
These grants are difficult to obtain and awarded to company’s who are producing something innovative, such as a new product/service to the marketplace with the potential of making significant profits. Where a competitor does already exist, you will need to prove why your product will be better.
Investment In Your Business
If you are looking for larger sums of money, and require access to that money for many years without repayment, then investment from other sources could be a valid option for you.
Dorset Business Angels are one such community that may help.
Dorset Business Angels are a Dragons Den type community who brings investors and entrepreneurs together to invest their own money into start-up and early-stage high growth businesses, in return for a share of the equity.
The money will be invested in the company, and not merely paid to the seller of the shares as a purchase.
The pros of Investor Investment, as opposed to say a loan is:
- Less risky. You technically don’t have to pay the money back
- Access to a wealth of business experienced and acumen. These are people who will be able to share a raft of ideas, solve problems, and open doors too.
There are cons to be aware of:
- An investor is for life. Yes, you could offer to buy the shares back, but it could be a lot more expensive than they paid in originally
- Investment is typically more expensive than a loan. Every time you take a dividend, guess what, they get a dividend too (equivalent to their percentage stake). Before long, it will start becoming a lot more expensive than the 6% interest for four years that you would have paid on a loan. And when you sell the business, naturally they are obliged to take their percentage too.
- You have now just brought in a fellow business owner, who will have their own ideas, and it might frustrate you. Just bear this in mind.
Crowdfunding
Crowdfunding is popular, and quite complex, and is really a subject that deserves an article of its own.
There are essentially three different types of Crowdfunding which are:
1. Equity-based Crowdfunding – This is where people ‘invest’ in your business, namely put money into the business in exchange for shares. The shares will be valued by you when you register on the Crowdfunding platform.
Equity-based Crowdfunding is heavily regulated so you will need to do your research and very open throughout the entire process.
Popular platforms in this domain are CrowdCube, Seedrs, and Indiegogo. I have used Seedrs and can recommend them. Seedrs are recommended if you need support throughout the funding stages from preparation through to completion.
Seedrs charge a £2,500 completion fee (plus VAT) AND 6% on all funds raised, so it can feel expensive when you’re raising hundreds of thousands.
2. Reward-based (or non-equity) Crowdfunding – This version is perhaps what most people think of when they hear about crowdfunding which essentially entitles the backer to the product or work produced by the campaign, in exchange for their money or donation.
This is a useful route if you have a highly innovative product, require sales, and potentially a means for your new product idea to gain popularity and feedback.
This is not a bad means for making a lot of sales early in your business and should be considered as a marketing campaign alone.
Kickstarter and Indiegogo are the main players in this market.
3. Debt (or Loan) based Crowdfunding (also known as Peer-to-Peer Lending) – Probably quite self-explanatory but this is a means of receiving a loan, without using a more conventional lender.
Most startup loans offer a rate of 6%, over one to five years. I think you would struggle to find this kind of deal through a Peer-to-Peer Lending site, but it is an option if alternative applications have been declined.
Zopa (which I have used for about a decade) and Funding Circle are the known names in this market.
Get A Loan
Loans are generally the cheapest means of borrowing money, assuming you need it for longer than a year, and less than say five years.
Another helpful element of borrowing through a loan is that the Loan Interest is Tax Deductible. So if you borrow at – the going rate of – 6%, you technically only pay 4.86%, assuming your company makes annual profits (aka pays Corporation Tax).
Loans are a relatively simple and speedy process and so one of the quickest means of receiving a larger volume of cash.
Finally, probably the primary reason why companies opt for a loan ahead of Equity Investment is that it does not dilute the shareholding. The owners thus continue to reap the full rewards from this investment in the business.
Using debt or money from a Loan is known as Gearing (in the UK, or Leveraging in the US).
Every Stock-Listed company in the UK will have Loans outstanding as this is considered the logical means of maximising growth whilst retaining the rewards.
In fact, most companies would see a ratio of 66% debt to 33% investment as healthy; so loans should not be considered dirty or cheating.
They are however riskier than investment, so please keep that in mind.
Firstly, Loan Repayments are mandatory, generally paid monthly, and often the repayments begin in the first month after receiving the money. This may even affect the amount of money you need to borrow.
Secondly, you will most likely be asked to provide a personal guarantee on the debt. That is, you will be liable personally, for paying the company’s debt should the company be in the unfortunate position of not being able to pay it.
The obvious loan providers to startups are StartUpLoans.co.uk and Virgin Start Up Loans. Both offer the same deal of up to £25,000 for 1 to 5 years at 6%. This is cheaper than your bank.
Alternatively, if you are under 30 years old, you might qualify for a loan of up to £5,000 with The Prince’s Trust. This again is at the same conditions of 1 to 5 years at 6%, as the other two.
An Overdraft
The final typical means of gaining access to cash is via an overdraft.
Overdrafts are actually a preferred option than they are given credit (no pun intended), assuming you need the money for 12 months or less. So again, it’s a decision based on the time you need the money for, more so than the amount.
Looking quickly, the overdraft rates I’ve agreed with my bank are 5.75% for between £500 and £25,000. That’s cheaper than the Loan, above and the interest would be tax-deductible here too.
Furthermore, it’s flexible, meaning I would only pay interest on the amount borrowed, and for the duration that it is borrowed. What a great facility!
So, why doesn’t everybody do this? It does become expensive if you learn to rely on the money.
Furthermore, and more fundamentally, a bank has the legal right to withdraw an overdraft facility within theory – no notice. So you may find yourself owing the full amount of your overdraft over breakfast. This could possibly leave your business in a very vulnerable place, so you do need to consider overdraft facility as a short-term option, and not a means of funding this year’s Fixed Assets.
Let’s Bring This To A Close
Be careful in regards to the amount of money you do borrow. Companies with too much money do have a very good habit of spending it unwisely with no thought to Return On Investment (ROI) or comparisons between project options.
Spending someone else’s money is notoriously less efficient than spending your own. You only need to peep over to Silicon Valley to see this first hand where it can be like watching Augustus Gloop compete in a running race against Usain Bolt.
You can email me at christophergrubb@informperform.co.uk to let me know how you’re getting on.
And good luck.
The right Virtual Finance Director is as committed to your business as a full-timer, but without the overhead.
I’m Chris, and I help business leaders clarify, simplify and improve the financial performance of their business. Maybe I can help you too?
