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Question for James: How do small companies raise development finance?
We are currently raising investment through Angel Investment Network and Crowdcube. I would like to ask you what other avenues of sourcing investment exist for newly launched businesses? We’ve had some great press exposure recently and are now looking for further investment to move the business forward.
Warren Heal, CEO www.rentmyitems.com
Raising finance is one of the biggest challenges that small business owners face. There are various avenues for sourcing investment out there, but you need to stand back and evaluate your long term needs and objectives before you decide which route is most suitable for you.
The way in which you raise the money can have a big impact on your business. All sources will be looking for a detailed business plan so you should be well prepared with one of these before you start. Debt funding, if you can get it, is cheaper than giving away equity, but it comes at a cost. You will have fixed repayments which can put the business under strain in difficult times. For a young business, it is almost certainly the case that the bank will be looking for a personal guarantee (referred to as a PG) which gives them security over other assets you may own such as a house or other property. Unfortunately, the shares in the venture itself will not be acceptable as security. Most business owners tend to raise money from people they know rather than professional investors, and often head to their banks later when they are experiencing growth.
There are a range of angel networks across the UK where high net worth individuals provide “club investment” to young and small growing businesses. This can be an attractive route but the downside is you are unlikely to get access to the investor themselves which obviously would be a huge benefit to a fledgling business. Often the most attractive route for a new business is to have a high net worth investor who takes a strategic interest in the business. More recently this avenue is opening up now that wealthy investors are looking for better returns on their funds due to poor returns on bank deposits.
The biggest challenge of course is finding such an investor in the first place. It can be like trying to find a needle in a haystack. Search on the web for investor networks and maybe do some detailed research of non-executive directors operating in your space. It can take the time to find the right person, but the benefits can be considerable. In terms of Angel Investor Networks there are plenty that advertise on the web. Make sure you have a good plan before you send it over. A plan that is not properly considered is likely to represent a missed opportunity.
Depending on the nature of the assets within the business, there is the possibility of some asset-backed lending whereby a speciality lender advances funds against a particular asset (or pool of assets) in the business. This is stock or debtors, but can be other assets over which there is no other current lien or charge. To the extent that the business has invested (or is proposing to invest) in real estate, the bank itself may agree to fund the asset purchase through a form of traditional mortgage loan. Dependent on the structure, there may be the need for a personal guarantee, but a well-worked structure can limit the need for this security and leave the residual risk of default within the business itself.
The market for institutional funding for start-ups is very limited. The size of the typical investment means that the economic dynamics are unworkable for many of the institutional funds. Depending on the money you are looking to raise, there is sometimes the possibility of preferred equity funding from an EIS or VCT fund, many of which such funds are currently operating in the UK. Look at the British Venture Capital Association website for a good list of funds that may be appropriate for you. Good luck!