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HOW TO RAISE FUNDS FOR YOUR BUSINESS
There is a well-known saying in business that ‘turnover is vanity, profit is sanity, cash is King’ and whilst you may cringe, the message holds firm. So what are the options if you find yourself in need of cash, either to start a new business, or to grow or rescue your existing business?
Whilst this may seem like stating the obvious, it is likely to be the quickest and easiest option available to you. It’s important to remember that if you can manage to rely only on yourself for funding then you are free to manage your business without interference from others. However, it may not be the choice for everyone as ultimately you are taking a financial gamble with your future.
Family and friends
A step on from self-funding, this option can again be quick and easy with terms often far more preferable than approaching external finance providers. Those who are nearest and dearest to you may be willing to lend for sentimental reasons, and as such you will likely benefit from lower rates of interest and flexible repayment terms. The important point to remember here is that there is nothing like money to cause arguments amongst family and friends, so you also need to consider the impact of losing that person’s hard-earned money!
Loans and grants
These are the most traditional way of funding a business – traditionally from a bank, although increasingly from second-tier lenders including peer-to-peer loans. It can be difficult to obtain a third party loan, especially if you have little track record and lack assets against which to secure the borrowings. Lenders will want to ensure you can afford to repay the loan, which may require robust projections and forecasts of profits, and most importantly, cash flow. The repayment terms will typically be inflexible and interest rates could be high, especially if you are rejected by a bank and are forced into borrowing from second-tier lenders.
A relatively new way of raising funds that is becoming increasingly popular, particularly amongst start-ups. Crowd funding is a way of raising money by asking a large number of people to each pledge small amounts. There are three main types of crowdfunding: donation, equity and debt. Donations can be made by people who do not expect a return and simply believe in what you are trying to do. Equity is where the investor will expect shares or a stake in your business in return. Debt funding is where the investors will expect their money back with interest. This is a popular route with people trying to bring a new product to market – they ask customers to pay for the product up front before manufacturing has taken place.
This term may be unfamiliar to you, but think Dragon’s Den. This is an increasingly popular method, where an investor with disposable finance looks for greater returns than those offered in savings. In exchange for lending, the Angel will take shares or a stake in your business. If the business then performs well all parties will benefit. If it doesn’t, then often Angels won’t expect their initial investment back. Angels often go beyond simply investing cash – they will also offer their experience and expertise to ensure the business is a success. Whilst this all seems great, don’t forget that this means you are signing over a share of your future earnings and the Angel is likely to have high expectations of performance.
Whichever method of funding you require, you need to consider carefully the risk being taken and ensure that you can meet the commitments you are entering into. It’s advisable to seek advice from an expert who can help you to achieve your goals in the way that best suits your business.
Paul Cox, Paish Tooth Limited
Tel: 01242 584050 | www.paishtooth.co.uk