5 ways to get funding for your start-up
Posted on 01/08/2018
There are five main ways of funding a company. You can use profits from sales, receive a grant, borrow money or receive investment. Sales, borrowing money or receiving investment can be from traditional sources or from “the crowd”. I am sure it is only a matter of time before someone creates a crowd powered grant platform….
1 - Sales
They are often overlooked as a source of finance for a company. You take the profits you make and reinvest them to develop the products and services you offer. You are of course in complete control, but generally you will grow more slowly.
The motivation for requesting other sources of funding is that you wish to accelerate the speed at which you can develop and grow your company. If you are at the pre-product stage, many people often use consultancy as a means of generating revenue to develop products. The risk here is that your consultancy distracts you from the product you are trying to build. Make sure you leave time and resources to chase the original dream.
2 - Grants
There are many grants for companies that are starting. You should think about the motives of the organization giving the grant. For example, your Local Enterprise Partnership and devolved governments are targeting specific geographies, charities will want to advance their charitable aims. Understanding the motives will help you to decide what grant is best for you and whether it is aligned with your business objectives.
What are the pros to grant funding?
They generally accept a higher risk for projects than traditional finance.
Because of the high competition for some grants, winning one of them can be used as a quality indicator when seeking other finance, such as investment or banking.
Grants can also be used as a door opener when building a consortium. Even if you do not win the grant, you may have made new connections that add value to your project.
What are the cons?
People see grants as zero cost, but they often forget the time cost of submitting applications and meeting report requirements.
A real risk is that companies develop something that is different to their original idea, just because a grant was available. This can be a distraction. Be aware of this risk and only apply for a grant to support something you would have done anyway.
Grants are rarely 100% funded. Generally, the larger they are, and the closer to market the grant output is, the less you receive. Typical project contributions are between 25% and 75%. You will therefore need to self-fund or seek additional finance to support the match funding for grants.
Finding grants can be a tricky time-consuming business. Speak to your Local Enterprise Partnership, European Enterprise Network, KTN or your devolved government who provide business support, to hone down the right ones for you.
3 - Banks
Banks are great providers of working capital. This is the money you need to finance your company during the day to day work. Banks are rarely used to fund growth. If you are a start-up, look out for loans from the Start Up Loans company. Also, check out Innovate UK’s Innovation Loans for late stage innovation projects that are too risky for banks.
What are the pros to bank finance?
It is very cheap, in that you are not having to part with any share in your business unlike equity investment.
Banks can also be very flexible in their approach.
What are the cons?
You have to be aware that loans can be called in. This means that the bank can ask you to pay the loan back quicker than planned if it decides that the risk profile has significantly changed.
Remember that banks now tend to make decisions centrally, so again think hard about how you explain things, as you are unlikely to be in the room as they make a decision.
4 - Equity Investment
Equity investment is when money is invested in a company through the purchase of its shares. Equity investors buy shares with the expectation that they will rise in value and that when they sell their shares at a later date, they will receive a return on their investment. Investors will take many forms. In the beginning, your company is likely to be pre-product and pre-customer. The most likely candidates for investing will be your friends and family. This funding helps you explore what the product is, who your customers are and what the market opportunity is.
With this information, you are then in a position to reach out to angel investors. Angel investors will generally be the first money that is more formally taken and will involve some sense checking (due diligence) and legal paperwork. Angel money is generally used to complete the product and take it to market.
The next step is usually venture capital and corporate venturing capital. These people are investing other people’s money. This might be long term money from an insurance company or retained profits from a large company. This investment will be used to generate profitable sales and grow the business.
The final step is for the investor to see a return on their investment. This is usually done either by selling to a company, known as a trade sale, or via an IPO (Initial Public Offering).
5 - Crowdfunding
Crowdfunding has risen in popularity over the last few years. Instead of securing funds from an organization, funds are raised from a large number of people typically via the internet.
There are four main types:
- Debt: use it to raise working capital for an ongoing company. You will need to pay this back to the people who have contributed.
- Equity: sell shares in your company.
- Reward: ask the crowd to help fund the creation of a new product and reward them with early access to the new product.
- Donation: just ask them for their cash… this is not often used in a commercial setting
When using crowdfunding, you need to create mass appeal. You will need to appeal to people’s emotions more than for the other funding sources we have seen so far.
What are the pros of crowdfunding?
There are 100s of platforms and lots of choice
They are highly flexible in that the options include debt, equity and reward.
They can help identify your customer base, validate it and add credibility.
What are the cons?
How do you choose between those 100s of platforms?
Be aware, not all platforms are regulated
You need to create momentum before launching the campaign, and this can be really time consuming
Often the funds raised will be from your existing network.
Choose the type of funding that:
- Meets your business objectives
- Is suitable for your stage of growth
- Is aligned with your risk appetite as well as investing organisation.
It is tough raising funds, but stick with it and stay confident. See your idea grow and develop based on the feedback you receive along the way.
If you would like help in raising funding or finance for your company, click here to get in touch with the Access to Funding and Finance team.