Equity Finance – What Are Your Options?
There are many ways that a business can be funded, but essentially, they fall into two main categories – equity and debt.
As a finance brokerage, we specialize in arranging debt finance for business owners.
However, we often get asked for our thoughts on how best to raise equity finance, so in this week’s blog, I’ve outlined the main options that exist for business owners when it comes to raising equity funding.
Equity Funding Options:
1. Bootstrapping – this is another name for ‘the business funds itself’. Hopefully as the business grows, it will begin to generate enough cash to enable further growth and expansion. The benefits of funding a business in this way is that you don’t have to give away any equity to a third party, therefore the business remains in your sole ownership. You also have the benefit of not taking on any debt funding with the obligation to repay it. The downside of bootstrapping the business, is that it is likely to slow and potentially hold back future growth. This is because you can only invest in the business when you have generated enough cash from sales, and obviously you have to continue paying your day-to-day operational expenses as well as then funding capital expenditure.
2. Self-Funding – the reality is that this is probably the most common way of funding a small business – start-up or otherwise. The business owner will self-fund the business either from savings or from personal debt such as a re-mortgage or second mortgage on the business owner’s private residence. Alternative forms of personal debt would also include personal unsecured loans or credit cards. This has the advantage again of enabling the business owner to retain full control of the business. Obviously, if savings are used that has the potential to impact the business owner’s future particularly at retirement and of course personal debt is either secured on the business owners’ main residence or if it is unsecured such as a credit card has the potential to be at a high rate of interest. So again, there are pluses and minuses of funding a business in this way.
3. Friends and Family – in truth, this is the option I would most advise against when it comes to funding your business. On the face of it, funding from friends and family may seem like a good idea at the time. However, it is likely to be either debt or equity funding which means the friend or family member now has a vested interest in your business. Not only that, but businesses do fail, and that’s when the problems can really start. The result can be ruined friendships, unpleasant family gatherings, difficult conversations. Someone once said to me: “Everyone will be your friend until you owe them money”. I have to say, I agree. Whilst it may be tempting to accept help and of course the friend or family member is keen to help you out, very often they don’t fully understand the risks involved until it’s too late. My advice on this as a funding option? Proceed with caution.
4. Partners – certainly an option. A partner can be a very good source of funding. Very often they are in or have been in business themselves and so they understand the risks as well as the journey. As a result, they may wish to have some involvement in the business, either in the day-to-day running of the business or in more advisory, non-executive role. But remember, you are no longer in full control. You now have a partner and have given away some equity in your business. Also choose your partners with care. Do you know them? Can you trust them? Over the years, I’ve had clients who’ve learnt from bitter experience when the bank account was emptied that the partner wasn’t as trustworthy as they had originally thought. So again, a great source of equity funding, but tread with care when choosing your partner.
5. Angel Investors – angel investors are typically high net worth individuals who are both able and willing to invest in to a business. There are now numerous websites where angel investors can be contacted as well as through various business support bodies such as the Chambers of Commerce or the Federation of Small Businesses. When it comes to approaching an angel investor for an equity investment, they will want to know all about your business – so you will need to know the business and particularly the numbers “inside-out”. But remember, whilst they need to be comfortable with you as someone they want to invest in, you also need to be comfortable with the potential investor as someone you would want to work with. So, think carefully about whether this is a process you want to go through, as many business owners like the idea of an investment but are perhaps less keen on the accountability that goes with it.
6. Crowd Funding – is a form of angel investing, except instead of just one investor you have numerous investors. This type of equity is web-based and can work for either an established or start-up business. The investment can be debt, equity or rewards based and there are numerous well-known platforms such as Kickstarter and Crowdcube which offer this type of funding as an option.
As I mentioned at the start of this week’s blog, whilst equity finance is not something we arrange, if you think your business could benefit from some correctly structured debt finance in the form of a business loan, mortgage, invoice finance or asset finance, why not give us a call on 020 8949 2122 or email us at firstname.lastname@example.org