You’ve been running a little while now, learnt a lot of lessons and had some very late nights and you feel it’s time to take your business to the next level. You won’t always have the cash in the bank or the revenue from your customers to get you there so you may need to source finance. We will go through the basics of the different types of finance and varying sources you can get money from in this article.
1. What are the different sources of finance to help my business grow?
Bank Finance. The clue is in the name with this one, you can apply to your current or other banks for finance. You will be required to show detailed financial records, present what you plan to do with the money and may be refused.
Alternative Debt Finance. Born out of the last financial crisis, the requirement to have alternative sources of debt finance boomed as SME’s, in particular, need easier methods of sourcing funding. This form of debt often involves less paperwork and the time to complete is usually quicker than bank finance. In return, business Directors’ are often required to provide Personal Guarantees and interest rates are usually higher.
Equity Finance. This is when you give away a proportion of your business in return for money. This can be done publicly or privately, through individuals or firms.
Government and Public Initiative Grants. You won’t have to repay this money but there will be specific criteria you will have to meet. Grants will usually not cover the entire cost of a project and/or growth plan.
Crowdfunding. You will be asked to put a proposal together which will be shown on the crowdfunding platform. You will be required to give something to the investors in return for their investment and this usually increases depending on the amount of money an individual contributes. For example, someone that contributes £50 will get early access to products and some that invests £500 may get a hamper of all your best products. You will also have to give all the money back if you do not hit your initial stated target.
2. What is the difference between equity and capital?
This may seem obvious but it is important to ensure that you have your terms straight when deciding and discussing with potential investors. Equity describes the control over a stake/number of shares in the business. When investors or firms ask for equity in your business this could be a percentage with you remaining in control, a controlling percentage of the business as a whole or they may want to buy you out completely. Capital refers to the introduction of investment either from existing Shareholders/employees or via external parties. This can take the form of debt or equity.
3. What are some terms to know when looking to finance the growth of my business?
Equity capital – you are selling a share in the business to the investor and sometimes they will be become an adviser to the business. They will use their expertise in industry to help with top line strategy because the more money the business makes, the more money they make.
Debt growth capital – this is where you take out loans to fund your growth plans and don’t relinquish any control over your business.
Working capital – this is the money you have/need to fund the day-to-day running of your business. It is not used for growth plans.
Growth capital – money you have/need to grow the business in any form, for example, loans, debts etc.
Venture capital firms – these firms will be interested in investing in new start-ups with massive growth potential.
Growth capital firms – will be interested in investing in more mature companies that can see the potential of their growth plans.
Private equity firms – a leveraged buyout, they will be interested in getting the controlling stake of the business.
Public equity – by floating your business on the stock market you will receive money for shares in your business from the public.
4. How do I write a pitch to attract external finance?
This is where your trusty business plan will come in. You may need to write a couple of different versions to use in your pitch depending on who you are talking to. Government grants will have different interests to private investors or banks. Identify what would make your business most attractive to the audience you’re presenting to and adapt accordingly. Have all your facts and figures to hand and know them inside outside. Practice your presentation and have an elevator pitch ready for those chance meetings with valuable connections or potential investors. Go to your local business growth hub for advice, they will be help you to organise and write your proposal, make you aware of any grants available to you and potentially point you to private investors.
