How does a start-up business get funding?
It’s a question which people have been asking for decades. Whilst people often imagine that getting money for a business involves a Dragon’s Den style process, there are a multitude of ways in which an entrepreneur can go about accessing the necessary funds to get their business up and running. Businesses can self-fund, apply for a bank loan, use equity crowdfunding, search for an angel investor, utilise the benefits of an investor network, or opt for P2P/P2B lending. Very often, businesses will use a combination of the above in order to raise funds, if not at the same time then at different stages. For example, an entrepreneur might use equity crowdfunding while they are at seed stage, but once their business is more established, seek the help of an angel investor to grow.
Despite so many options on offer, businesses are often unsure of how to go about getting money. The task can be daunting, and people can become concerned by interest rates and instability in the market. Additionally, entrepreneurs are so busy trying to juggle multiple tasks that funding can sometimes slip down their to-do list. In an attempt to demystify investment, we spoke to several business experts from our network on how entrepreneurs can tap into funds, why they often find it difficult, and how to portray themselves to get the right investment.
Our Executive Director Mike Herd says that entrepreneurs often shy away from using a mixture of investment types, when in fact, it can be hugely beneficial to them. Mike also revealed one of the essential factors to securing investment. "The ability to provide good, basic financial data is key to building the investor’s confidence in your idea, but you have to be realistic. You have to consider not only if you can afford to repay, but whether or not your sales forecast is overly ambitious. A lot of businesses can become unstuck by enticing investors with high sales forecasts in order to secure investment, but then not being able to fulfil them."
"Investors are looking for entrepreneurs who know their market, their competitors, and their customers. It also benefits entrepreneurs hugely if they write their initial business plan themselves, as opposed to sourcing external help. At this stage, people are investing in a personality as much as they are investing in the business plan – this needs to shine through."
In order to find out about more traditional forms of investment, we spoke to Neil Richardson, Businesses Relationship Director at Santander. "We offer businesses a range of services, from overdrafts to investment, loans to credit cards, and everything in between. We can help entrepreneurs to access different schemes, which help those who aren’t necessarily applicable for traditional loans. We have a growth accelerator, for businesses who are looking to scale up in terms of employment or turnover. We also have start-up networks which are based in bigger towns.
"When it comes to applying for financial help, we meet with entrepreneurs in person, and there’s then an application process, where we look into the legal side of things and assess security of the loan. One of the advantages of using a high-street bank to access funds is that you retain full independence of your company – we don’t ask for shares. It's key for any entrepreneur thinking of applying for funds to acquire lots of help and advice, otherwise it makes the journey a lot harder."
Nic Conner (Head of Enterprise & Economic Development at Rangewell) also had an interesting perspective. Rangewell are business finance experts who use their expertise to help businesses find, compare, and apply for all types of business finance. They use an algorithm to match businesses with lenders, in order to get a finance solution that works for all parties. "We've mapped entire business markets, and built a matching algorithm that pairs our 300 lenders with the correct business - it's like a price comparison site for business. Our team of ex-bank managers speak to businesses, get to understand them, and then pair them with the right finance. We work with all businesses, from sole-traders to large corporations. For debt finance, it’s important that businesses understand that lenders will only lend to what they know a business will be able to repay, by assessing the business' turnover.
"If the business is very early-stage, then the lenders will look for other means of security, such as their house or their car. Businesses need to think about if they’ll be able to afford the debt."
We've all heard of crowdfunding campaigns to raise money for various projects, but crowdfunding can also be used to help entrepreneurs get the necessary investment to launch their business. While crowdfunding sites such as Kickstarter and Indiegogo focus on raising money exclusively via the crowd, Brighton-based equity crowdfunding company Shadow Foundr take a slightly different approach. We spoke to Jason Kluver (COO) to find out how the company help entrepreneurs to access funds.
"Shadow Foundr has already raised in excess of £16m for early-stage businesses. We believe equity crowdfunding has truly earned its place in the alternative finance world, as a viable means of raising money for an unlisted business, and its future is extremely exciting."
"Our model is unique however, in that all opportunities placed on our platform go through stringent due diligence, undertaken not only by us, but also via our network of private investors, who crucially must fund an opportunity to at least 30% of its target, before it is put to the Crowd. Most of these private investors choose to be passive investors in the businesses, however some will offer further assistance and advice if required".
Finally, we spoke to Jamie Young from Plus Accounting, a firm who offer start-up finance advice among a comprehensive range of tax and accounting services. “When approaching investors for finance it is critical to have detailed financial projections, and to ensure that these projections are tailored to the type of investment being sought. These will need to highlight the key areas; an investor will need to see in evaluating whether to invest. For example, a provider of loan finance will be interested in the ability of the company to service that debt over the term of the loan. An equity investor will be interested in how the company will use the investment to accelerate growth in turnover and profitability and will be less interested in the immediate ability to repay as their return is typically received at the point of exit.
"A detailed projection ensures that the business owner fully understands the financial dynamics of their business and what the financial cost of their strategy is to achieve success. Any investor, particularly equity investors, will expect the owner to have a detailed understanding of the projections and will expect the owner to be able to answer any financial questions they have to ensure that the owner has adequately costed their strategy and assumptions made in the plan. Plus Accounting have substantial experience in producing detailed financial forecasts and have successfully assisted in the raising of loan and private equity finance for clients."
Whether you’re an entrepreneur looking for investment, or an established business considering changing how you access funds, Sussex Innovation, and our network of investors and advisors, can help. We can give you advice, put you in contact with the right people, and take some of the weight off your shoulders. Click here to contact us, or read more of our business advice articles here.