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23May2014

The New Way of Funding your Business

  • By IFG2014
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I recently went to the Business Show 2014 at the Excel in London.  The show is full of companies with ideas to help you grow your business.

One area which should be close to every business owner’s heart is funding, as without funding you do not have the fuel to fan the flames of growth.

Doug Richard, well-known entrepreneur and investor from the BBC show ‘Dragons Den’ gave a presentation on ‘alternative funding to grow your small business’ which inspired me to write this blog.

Now I am not telling you anything new when I suggest we need to tap into our own resources before exploring alternatives.  Family and friends is the next port of call, however, starting a business is risky and it can be difficult to repair relationships should the business fail.

Your next thought would most likely be to visit your bank, which is the most conventional source of lending.  However, due to recent EU legislation (Basel 2 and above) banks have a natural aversion to lending to new businesses as these are inherently seen to be risky and banks don’t like risk especially if there is an easier way of making money.  Well established medium-sized businesses with a track record of success and sustainability are the type of risk profile banks will consider.  Of course, the government is making claims that it is forcing banks to lend to small businesses but actions speak louder than words and bankers paymasters are their shareholders within the regulatory framework.

So what are alternatives and which should you consider?

Well, if you have been trading for less than 12 months and your funding requirements are less than £10,000, you might want to consider applying for a start-up loan which is a government backed initiative to kick-start fledgling businesses.  In addition to funds, you are provided with mentoring and ongoing support.  You can find more information at www.startuploans.co.uk.

For those of you with more ambitious funding requirements, you might want to consider ‘crowdfunding’.  As the name suggests, you need to find a crowd of private individuals who you are able to convince of the merits of your venture and incentivise them to provide you with funds in the form of a loan.  This is called ‘reward-based crowdfunding’.  The advantage of this type of funding is that you are not parting with equity (ownership) and therefore maintain full control of your business and destiny.  You will, of course,  need to have the right idea and business which lends itself to inspire your crowd.  Two leaders in the space, according to Doug are www.kickstarter.com and www.indiegogo.com with the latter being aimed at global start-ups.

An alternative to the above is called ‘equity crowdfunding’, where you will need to consider swapping part of the equity for funding.  The main benefit of crowdfunding is that  these investors also have an inherent interest in the success in your business and could potentially have relevant backgrounds and expertise you can leverage.  Also, you will not have any interest to repay therefore helping cash flow.  According to Doug, two leaders in the space are www.seedrs.com and www.crowdcube.com.

Should you be looking for funding up to £150,000, you might want to consider working with business angels (also known as ‘angel investors’).  This is likely to be a select few high net worth individuals who beyond the funding offer mentoring as part of the package.  Now the government has given high net worth individuals an incentive to invest and  limits the risk substantially.  As an investor, you can invest up to £100,000 and offset 50%  of the value of the investment in the form of income tax relief.  If you later make profit on the sale of your shares, you are exempt from capital gains tax on that profit.  If, on the other hand, the company fails you may be able to offset your loss against your income tax.  In short, the government is reducing the risk for investors but also underpinning new ventures.  The key for the business, however, is to seek SEIS approval.  For further information, please visit www.seiswindow.org.uk.

Should you have even larger ambitions and want to raise more than £150,000, there is the  Enterprise Investment Scheme (EIS) where individuals can invest up to £1m per tax year and  receive 30% relief on income tax as well as avoiding capital gains against profits.  Again as a business, you need to make sure they fulfil the eligibility criteria throughout the term of the scheme.  For further reading, please go to www.crowdcube.com/pg/eis-seis-tax-relief-overview-43.

If you are  not sure which funding option might  be most suitable for you then you might  want to  take a look at the  following website www.alternativebusinessfunding.co.uk.

Good luck with your business and keep in touch!

From your IFG Consulting Team.

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