Anyone who is planning to start up a brand new business or expand their existing business knows how crucial it is to raise finance in order to do so.
There are many things you need to consider when raising capital, and there are many ways to do so. This article looks at five of the most common methods, which are:
- Selling Shares
- Bank Loans
- Borrowing from friends and family
One of the most traditional ways of getting money (or more money) into your business is by selling shares to investors. This is only available to limited companies, and means that people invest money in to your business, and in return they then own part of your business. This means that they get a share in any of the profits and also have a say in the running of the business, and therefore that you own less of your business, get less of a share of the profits, and have less of a say in the running of it. This can put a lot of entrepreneurs and business owners off, but it is worth remembering that investors can often bring a great deal of experience and knowledge with them as well as money which can be of huge benefit to your business. One method of doing this can be through getting help from an “angel investor” – private entrepreneurs looking to invest large amounts of money in businesses that they believe in and want to help be successful (think of the BBC series Dragons’ Den).
Another traditional way to get money for your business is to go to the bank and get a loan. However, this can mean that you have to pay a high level of interest, and the bank may not be willing or able to give you the full amount that you need in order to start up your new business or expand your existing one. Also, if you are a brand-new start up business or are quite a young business then banks may be uncertain about taking a risk by loaning money to your business. However, the benefits of a bank loan are that you don’t have to give up any shares in your business, and you do have an element of certainty; you will know exactly what you have got to repay and when you have got to repay it laid out in detail in a repayment schedule.
Many businesses don’t realise just how many grants there are available out there which they may be eligible for. Quite often there are schemes that have money from sources such as the government or the European Union that are just desperate to give money to eligible companies and struggle to do so. Grants are an ideal source of raising money because you don’t have to sell any shares in your business or pay the money back. However, at the same time there are often a lot of hoops to jump through to get the grant, a lot of complex paperwork to fill in, and after having gone through all of that you might not be successful, or might only come away with a fraction of the amount of money that you need.
A less traditional method of raising finance for your business is crowdfunding. This is a relatively recent way of getting investment in your business that has grown along with the internet. Online crowdfunding involves getting members of the public to donate money to or invest in your business. Rather than asking a small number of people for a large investment, this method involves asking a large number of people to make small investments. Of course, it is not as simple as that, as you still have to persuade people to part with their hard-earned money, so people have to believe in you, your business and your products or services before they are likely to invest. A downside therefore of crowdfunding if you need a large amount of money is that you must convince an awful lot of people if they are only investing small amounts.
There are two main methods of crowdfunding. One is where you offer investors some sort of incentive or reward for investing, such as an exclusive product or something free. This is known as reward based crowdfunding. The other main type is where people invest in return for a small share in your business. This is known as equity based crowdfunding.
Borrowing from friends and family
To anyone under the age of 35 trying to get on the property ladder then this concept is probably familiar. “The bank of Mum and Dad” has been a well-known way for a few years now for young people to be able to get enough money for a deposit on their own house, and the same method is used for starting up or even expanding a business. Of course, it doesn’t have to be through parents; it could be through any friends or relatives. The downside is that there is always the risk that if something goes wrong it could jeopardise the friendship or relationship, so you need to consider this seriously before going down this route. You also need to make sure that all the terms and conditions are properly laid out and agreed upon, such as how much the loan is, how often repayments should be made, when it needs to be repaid in full by, whether interest is to be paid on the loan and if so how much. These have the potential to cause tension further down the line so need to be formally agreed from the beginning. The big benefit of this method however is that friends and family are more likely to be flexible than the bank, and will probably demand much less interest.
Each of these five methods has its pros and cons, and a lot will depend on you, your business and your individual requirements. There will almost certainly be legal implications to whichever method you choose, so before you go too far, we recommend that you seek advice from an experienced corporate solicitor.
The corporate department at Sills & Betteridge Solicitors have a very experienced team of lawyers available in Lincolnshire and across Central England who are committed to assisting our clients with the full range of legal services required by businesses. Our expertise with both large and small enterprises, from owner-managed businesses to listed companies, means that we can tailor our legal advice to your specific needs and offer you the most appropriate, efficient and cost-effective solutions. We can offer advice on commercial law to clients at a local, national, and international level.
For more information about raising investment for your business, please contact us on 0800 542 4245, email us on firstname.lastname@example.org or call in to one of our offices.