In order to grow and run your business, you may need to raise finance at some point in your business life cycle. Having a sound business plan and a future strategy are key to raising finance.
There are two main ways of raising business finance.
- Equity Finance
- Debt Finance
Raising finance through this method would mean giving up a share of your business and hence diluting your ownership of the business. It is also a rather long and expensive process.
The benefits could be invaluable support, experience, resources and access to new markets that new investors could bring to the business.
The other crucial aspect is having the right investors who share the same vision and strategy for the company and can work with you closely to realise the potential of your business.
Some forms of equity funding are:
Angel investors are individual investors who normally invest in startups and early stage businesses and have expereince in growing small businesses. They also have a network of useful contacts in the industry which could be very handy for the business they invest in. They normally demand a significant share of business in return for their investment as they consider their investment to be a high risk.
Venture capitalists only invest in businesses with a proven track record and with a potenital of high growth and high returns.
They rarely invest in early stage or pre-revenue businesses. The process is rather long and expensive and a sound business plan is a must.
Private equity investors normally invest in businesses with a medium to long term view and with an aim to increase the value of the company by developing its products and putting in place a new management structure. Once they manage to increase the value of the company in the medium term, they normally exit.
Crowd funding connects a business with a large pool of potential investors through an online platform. It is particularly popular with startups as it allows thousands of backers to invest even a small amount in return for a share in the business. Mostly those backers tend to be early customers of the business.
Debt finance is used for funding working capital or any other long term investment in the business. This could be in various forms but they don’t involve relinquishing any share of the business or diluting control of the business.
Some forms of debt funding are:
Bank loans & overdraft
Bank loans are normally used for a medium or long term investment or significant capital purchase. A bank overdraft on the hand is usually used for short term funding of the working capital.
Both these forms of funding normally require some form of security.
Peer to Peer Lending
Peer to Peer lending happens through an online platform that connects individual borrowers and lenders without any middle men like banks. It aims to achieve better rates for both borrowers and lenders. It is a very flexible approach and normally a cheaper alternative to bank loan.
This form of debt finance helps with cash flow as the asset can be purchased through a lease or hire purchase agreement. The business doesn’t have to pay the full price of the asset upfront but over a fixed period. The agreement is secured on the asset being financed.
A factor will normally advance most of the value of the outstanding sales invoices to the business. The factor then chase the money owed by the customers of the business. The balance is being paid once the customers have fully repaid their debt.
As summarised above, there are many ways of raising finance for your business depending on your business model, position in the growth cycle and future business plan.