Funding is vital to help a business grow, but not every source of funding is the same, and not every source is suitable for every business. Below you can find information on the most popular funding options available for your venture.
- Equity Crowdfunding: unlike rewards-based crowdfunding, which is usually based on donations and goodwill support, equity crowdfunding involves networks of small investors backing early-stage businesses via online networks, whose primary motivation is a financial return. It allows startup companies to raise money without giving up control to venture capital investors who usually drive a harder bargain, and it offers investors the opportunity to earn an equity position in the venture. Furthermore, investors via crowdfunding often become customers. Equity crowdfunding is perfect for young companies looking for initial capital and those companies that have a large potential consumer base such as a brewery, restaurant or a watch manufacturer. In the UK, the Financial Conduct Authority (FCA) regulates investments in equity-based crowdfunding ventures.
- Initial Public Offering (IPO): first time the stock of a private company is offered to the public on an exchange such as the Alternative Investment Market (AIM) or London Stock Exchange (LSE). IPOs are often done by mature companies seeking capital to expand and become publicly traded. Costs involved dissuade smaller companies.
In an IPO, the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue, the best offering price, the number of shares to be issued and the time to bring it to market.
- Venture Capital (VC) is a type of private equity, a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth (in terms of the number of employees, annual revenue, or both). Venture capital firms or funds invest in these early-stage companies in exchange for equity – an ownership stake – in the companies they invest in.
Most VCs target companies that have completed a number of earlier Business Angel rounds and typically seek to invest a minimum of £1 million. However, the trend is changing and there are VC firms targeting younger companies, to get in at an earlier stage.
- Business Angels: private investors who support early-stage businesses make equity investments in businesses with growth potential, businesses in the early stages of development, or in established businesses looking for expansion capital, in return for an equity stake. Angels back high-risk opportunities, with the potential for high returns.
Suitable for most small companies of any age. A business Angel can offer a wealth of knowledge, contacts and support for a venture.
- Invoice Finance: part of the stream of asset finance whereby businesses borrow money based on amounts due from customers. Invoice financing helps improve cash flow, pay employees and suppliers, and reinvest in operations and growth earlier than they could if they had to wait until their customers paid them. Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the money. Invoice financing can solve problems associated with customers taking a long time to pay and difficulties obtaining other types of business credit.
Invoice financing is perfect for companies that are generating revenue but might have long payment lead times on invoices. These can include wedding venues, import/export companies and manufacturing firms.
- Loans: debt financing includes both secured and unsecured loans. Security involves a form of collateral as an assurance the loan will be repaid. If the debtor defaults on the loan, that collateral is forfeited to satisfy payment of the debt. Most lenders will ask for some sort of security on a loan as most will not lend money based on a name or idea alone.
Loans are better for established companies that have a source of revenue and a timeframe for repayment. This is great for those companies that do not want to sell equity in their entity. As well, many project based businesses such as property development can take advantage of a loan to fund expenses.
- Peer-to-Peer Lending: a form of debt funding where internet-based platforms are used to match lenders with borrowers, without the use of an official financial institution as an intermediary (also known as crowdlending). You place your lending needs online and potential lenders bid on your loan by agreeing to provide the requested loan at a given interest rate and at a fixed repayment schedule. Funds can be provided by investors around the globe and this is an effective form of alternative debt funding as it is a new way for businesses to have access to flexible finance.
- Start-Up Loans: unsecured personal loans for entrepreneurs who are looking to start a business. Most start-up loans are structured on a monthly repayment schedule, based on a loan repayment term of between one and five years. There is mentoring and support given to start-ups to help the start of your business venture. Nevertheless, remember that it will be your personal responsibility to make loan repayments if your business does not succeed. Due to limited revenue or high costs, most start-up businesses are not successful in the long term without additional funding from venture capitalists.
Start-up loans are small, a maximum of £25,000 per director, and are only suitable for new and very young companies.
- Bonds and Mini-Bonds: bonds – retail bonds or corporate bonds – are a way for companies to borrow money from investors in return for regular interest payments. They are debt securities, bought and sold on a market. Large companies might be able to borrow money by issuing bonds to investors.
EQUITY & DEBT FINANCE
- Mezzanine Financing: short-term solution mixing both debt and equity finance where a company replaces the capital that equity investors would otherwise have to provide. Owners can sacrifice control and upside potential due to the loss of equity. Owners also pay more in interest the longer mezzanine financing is in effect. It represents a claim on a company’s assets which is senior only to that of the common shares. Mezzanine financings can be structured either as debt (typically an unsecured and subordinated note) or as preferred stock.
OTHER FINANCE SOURCES
- Grant: non-repayable funds or products disbursed by a grant maker, often a government department, corporation, foundation or trust, to a recipient, often a nonprofit entity, educational institution, business or an individual. Most grants are made to fund a specific project and require some level of compliance and reporting.
- R&D Tax Reliefs support companies that work on innovative projects in science and technology. It can be claimed by a range of companies that seek to research or develop an advance in their field. It can even be claimed on unsuccessful projects.
- Tax Reliefs: these reliefs allow companies to claim substantial deductions in (or tax credits against) corporation tax for some of their investment in new production. Most companies should be able to take advantage of tax relief and should consult their accountants.
Crowd for Angels is an FCA authorised and regulated crowdfunding platform that funds companies through the issue of shares, crowd bonds and digitalised assets to investors. Begin your fundraising journey or start exploring top investment opportunities here.