How to fund your business

How To Fund Your Business
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How To Fund Your
Business
Guide on how to fund your business in the
in the current economic environment.

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© Copyright 2013 | arinobe.com

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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

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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.

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How to fund your business

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