The Entrepreneur: Routes to Finance
One of the main issues often faced by start-up companies and growing businesses is the fact that completely organic growth is not always a possibility, and that sometimes, in order to reach the next stage of development, it may be necessary to seek external investment.
Last month we featured an article by HKFsi outlining a number of different steps that can be taken in order to help ensure your business is ready for investment. This month, we are going back to basics by providing an overview of some of the most common routes to finance available for entrepreneurial businesses.
Funding effectively comes in two basic forms:
- Equity funding: Raising finance through the sale of shares in the company. The investors become shareholders and, in turn, share in any risks and rewards experienced by the business. One of the key benefits of equity financing is that it helps to ensure any cash generated can be used for reinvestment into the company, as opposed to being allocated to debt repayments.
- Debt funding: Opting for the equity route, and therefore a partial loss of control of the business, will not be an ideal choice for everyone. As an alternative, it is possible to raise money through debt financing, under which the company will usually be expected to repay any outstanding loan with an additional interest charge.
Sources of funding
These can come in many different forms, although broadly speaking bank loans represent a classic example of debt funding.
It can sometimes be difficult for an entrepreneurial business to raise significant finance in this way as often banks may want proof of a financial ‘track record’ in order to substantiate the loan request. Nonetheless, there are a number of initiatives that have been established in the UK in order to encourage the funding of start-ups and developing companies.
Angel Investment typically consists of an individual investor, or groups of investors, offering finance to high growth entrepreneurial companies in return for an equity stake. Often, the terms associated with such investment can be more favourable than alternative routes.
Despite the fact that angel investors are likely to require a certain element of control over the organisation, these individuals will often possess a great deal of business expertise, which in turn can help the business to flourish.
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) have been designed to provide significant tax reliefs for angel investors in order to encourage the growth of SMEs and entrepreneurial businesses. Our blog here provides further details of these schemes.
This type of finance effectively comes from a large network of people and/or organisations that each contributes relatively small sums of money, collectively amounting to a substantial sum.
In recent years potential funding sources have become even more accessible through the use of innovative websites, such as Kickstarter and Indiegogo. These websites allow businesses to showcase their products on a global scale. Those contributing finance through these channels are often members of the public, as opposed to more ‘traditional’ investors.
Whilst there is no guarantee of success, it is clear that the possibility to raise significant finance via crowd funding is very real. Take Kickstarter as an example - this website is primarily used to raise finance for creative projects, and to date over 56,000 projects have been successfully funded globally. Of these, over 1,000 have raised between USD $100,000 - $999,999 (£59,715 - £597763.76).
Some companies may wish to raise finance by selling equity in a public market place. Joining a public market can provide a mechanism to raise capital as well as creating a vehicle to achieve share liquidity and release value for current shareholders.
Consider, for example, the Alternative Investment Market (AIM) market – this is the London Stock Exchange’s marketplace for growing, entrepreneurial companies, and is currently the largest growth market in the world. The figures for January 2014 indicated that there are over 1,000 companies currently trading on AIM, and that just over £250 million was raised in that month alone.
Can employee share schemes help attract investment?
In order to attract investment, it is vital to have a dedicated team of employees that the potential investor can rely upon to bring the company’s ultimate commercial vision to life. Having employees that are motivated and incentivised helps set your organisation apart from other players in the industry. This shows investors that the employees can help to create a significant competitive advantage.
Having an employee share plan can highlight to investors that your employees are committed long term to the business. By having an equity stake (be it in the form of options or actual shares), employees’ interests become aligned with those of the majority shareholders, bolstering a joint desire to grow the business and increase share value.
If you would like to find out more about potential routes to investment, and how share schemes can help your bid for finance, please contact firstname.lastname@example.org or call 020 8949 5522 to speak with a member of the team.