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How to fund your business

How to fund your business



A guide on funding options for startups

A guide on funding options for startups



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    How to fund your business How to fund your business Document Transcript

    •              How To Fund Your Business 1 How To Fund Your Business Guide on how to fund your business in the in the current economic environment. ` © Copyright 2013 | arinobe.com
    •              How To Fund Your Business 2 Table Of Contents Self Funding Friends & Family Bootstrapping Invoice Finance Leasing Business Angels CrowdFunding Reward Equity Loan Banks Seed Funding & Support Government grants and loans Venture Capital Stages in Startup Funding Idea Phase Development Phase Seed Phase Angel Phase Venture Capital Phase ` © Copyright 2013 | arinobe.com
    •              How To Fund Your Business 3 Introduction The rate of new businesses registrations has rapidly accelerated in the UK over the past few years. It is estimated that a record 500,000 businesses start in 2013, with this number set to rise in 2014. One of the first challenges of any new business owner has to face is how to fund their business. This white paper will take you through the most popular ways to fund your your business and will provide an analysis of each. Self Funding 60% of businesses are started with capital injected by their owners. It is advisable to start off your business with your own money, even if you want external finance from a business angel or bank in the future. It is simple, if you believe in your business, you will invest in it. Investors will be reluctant to invest in a company where the owner has not invested some money. Do not risk your overall financial well being on your business, but you should be prepared to invest. Keep a track of just much of your personal money you have put into your own business. Friends & Family About 10% of startups are funded by friends and family as it is a lot easier to get money from them as they already trust you. The main drawback is the added pressure that comes from getting money from people that you know personally. When receiving money from family and friends its always a good idea to get an agreement written down so everyone is clear. It should be clear whether the sum of money is a loan or equity investment, this avoids confusion in the future. ` © Copyright 2013 | arinobe.com
    •              How To Fund Your Business 4 Bootstrapping Bootstrapping is a way of self financing your business venture using the revenues from your business. Bootstrapped startups do not have a lot of spare cash, this forces them to find ways to save money. Bootstrappers find bargains, utilise free and freemium services, crowdsource operations, use open source software and basically do whatever it takes to make their business work within the budget. Bootstrapping isn't all about saving money. You can help elevate your business buy finding resources or premises that can provide your business with added prestige and help build your reputation. Two traditional ways of bootstrapping are: Invoice Finance Invoice finance is a great way of funding your business through your sales. Invoice finance allows you to receive 80%-90% of your sales within a couple of days instead of 30 or more days. Leasing Leasing (renting) instead of buying assets and equipment relieves pressure on your business's cash flow. ` © Copyright 2013 | arinobe.com
    •              How To Fund Your Business 5 Business Angels Business angels are usually wealthy individuals who invest in small fast-growing companies for their own profit but also for enjoyment. They are usually established entrepreneurs that enjoy the thrill of working with a start up. Business Angels want to be actively involved in the company but do not want to get involved with the day to day running. Business Angels tend to invest from £10,000 to £750,000 in exchange for up to 50% of the business. The average investment by a UK Angel is around £40k. Currently angel investment has been focussed on businesses that have been trading for at least two years, are showing signs of high growth and they can see an exit strategy. Angels also tend to invest in companies in industries that are familiar with and have made money in that industry. There are many business angel networks you can join and submit your business plan, if there is interest, it is likely you will have to pitch your business to a potential investor. The main advantage of angel investment is the advice, support and business connections that an experienced angel can provide. This can be even more valuable the equity investment they provide. The only drawback of angel investment is that you may have to give away more of your business than you had originally planned to. ` © Copyright 2013 | arinobe.com
    •              How To Fund Your Business 6 CrowdFunding Crowdfunding is a new way of obtaining finance where large groups of people can invest small amounts of money in your business. Crowdfunding is growing fast and is becoming a viable option for all businesses. There are many crowdfunding option available to entrepreneurs, these are: Reward This is where people fund your business in exchange for rewards. Possibly the most well-known site to offer this form of funding is Kickstarter. Equity This is where the crowd invests in your business in exchange for equity. Loan This is where you raise a loan and repay with interest. In raising funds from the crowd, not only do you secure the capital you need but you also attract attention and an audience of potential customers. Crowdfunding is highly accessible, entrepreneurs can still get their businesses funded when they have refused by business angels and banks. The downside of crowdsourcing is that you will not get the type of support you might get from a business angel and access to their business connections. ` © Copyright 2013 | arinobe.com
    •              How To Fund Your Business 7 Banks Going to the bank is the traditional way to obtain finance for your business, and if you are an established business and prepared to offer some security against your loan it is still a viable option. If you are a seed or start up without a long trading history obtaining finance from a bank is unlikely. Banks do provide small businesses with credit cards and overdrafts that can be very helpful in difficult times, however they should only be used as emergency funding. Banks are looking for security and assurance that they will recover the money that are lending to you. If you can offer personal guarantees this will strengthen your position. When analysing your business banks will want to see that you have positive cash flow and are profitable. Do not approach a bank for a new loan if you are looking to cover losses. Banks occasionally do lend to cover losses, but this facility is usually only open for existing customers. Banks will inspect your forecasts and start up costs to ensure your projections are robust. Banks are more likely to look through the details of your business plan. Understand your break even point and how much sales you need to turn a profit. Banks assess new loans using the CAMPARI method, the acronym stands for: Character They will want to know if you are honest and reliable. A strong business or employment history will help. Its also easier to get a loan from the bank that you currently for business or personal finances. Ability You will need to prove to the bank you and your team have the business acumen to manage a successful business. Use your previous trading or business plan to back this up. Margin or Means The bank will want to know if your business has significant net assets – how does this commitment compare to the amount requested from the bank? Are profits retained in the business? Purpose Why do you need the money? Is is to buy equipment, overseas expansion? You need to have a plan for the money, banks will not cover contingencies or losses. If this is the purpose of your loan you should be seeking equity investment. ` © Copyright 2013 | arinobe.com
    •              How To Fund Your Business 8 Amount You need to understand your requirements and be able to back this us in your financial projections. Repayment This is probably the most important factor, your previous trading history and/or your business plan should demonstrate that you can repay the loan. Insurance Can you offer the back a guarantee they will recover the money loaned if you default? Banks will want security against your loan, whether it is through your business or a personal guarantee. Banks will expect you to have prepared a full business plan or funding document to support your application. Unlike investors banks usually read your full business plan. Make sure it is compelling and succinct especially the financial projections as they will be intensely scrutinized. ` © Copyright 2013 | arinobe.com
    •              How To Fund Your Business 9 Seed Funding & Support For seeds and start ups business incubators and accelerators are a great way of gaining funding, knowledge and support as they provide them with a base with other similar-sized companies. If you are starting up a technology company or social enterprise, there are many great options available. Many universities run incubators for recent graduates and will provide them access to research facilities and will provide them with funding for 1-2 years. Government grants and loans The government has made £117.5m open for Start Up Loans up to 2015. This is one of many startup loans available and literally thousands of grants that are available for entrepreneurs. The application process for government loans and grants can be very long and complicated. They also require match funding from the business owner. Before applying for government-backed loan or grant seek professional advice as there are literally thousands of grants available to small businesses, and you need to choose the right one for your situation. Below is an overview of the products that are currently available. Direct Grant A cash award for activities such as training, employment, export, capital investment projects usually required to put up around 50% of cost Repayable Grant Funding offered with intention that monies are paid out of future revenues. If the project fails, the grant is written off Soft Loan The T&C’s are more generous than normally, for example the interest rates are lower. Equity Finance Provider of funds gets equity share When value of the firm increases stake returned Requirements usually less demanding ` © Copyright 2013 | arinobe.com
    •              How To Fund Your Business 10 Venture Capital Venture capital is financial capital provided to early stage, high-growth startup companies, usually in the technology and scientific industries. Venture capitalists are investment firms who have large sums of money to invest in the right type of business. Do not approach a Venture Capitalist if you are looking for investment in your business of less than £1.5m. Venture Capital is out of the reach of most businesses, it limited to exceptionally high-growth companies. If you do get funding from a venture capitalist, you should be prepared to lose majority of your business. Stages in Startup Funding Funding your startup should be viewed as a journey. If you want your business to grow continually it may not be enough to get just a startup grant or bank loan.  You may require several funding rounds, from initial the startup grant and ending up with venture capital funding Generally there are five stages of startup funding, however not all businesses go through every stage.  The phases are: Idea Phase The original entrepreneur thinks of the business idea and immediately starts investing time and money into developing the business idea. Development Phase This phases commences when the original entrepreneur has worked on the idea and proved the concept to themselves and close friends and family. They realise they do not have all of the skills required to run the business and start looking for help.  Without any revenues to pay anyone they eventually seek a co founder. Seed Phase This is probably the most familiar stage of for most entrepreneurs.  The idea has now reached a level of maturity that now needs to be fully tested in the market place.  The ` © Copyright 2013 | arinobe.com
    •              How To Fund Your Business 11 founders believe is now ready to launch. They write a business plan and ask for investment from their family, friends and start seeking other investment options. They do not realise the business is not mature enough to approach banks and business angels, however this is a perfect time to seek seed funding, startup loan or grant. This is a good time to start expanding your network by seeking a help of an advisor that can assist with the development of the business. Angel Phase If the business is growing rapidly and there is a commitment within the team to expand the business you should seek angel or crowdfunding investment. Venture Capital Phase If the business continues to grow rapidly and you are showing signs of becoming a market leader your business will attract attention from venture capital firms. ` © Copyright 2013 | arinobe.com