How and why you should consider investment in your business
You don’t need investment to start a business. However, you do need money and, depending on the nature of the business, probably more than you think. Even the smallest start-up businesses need money for marketing and to buy the equipment.
You’ll also need to fund your living costs until the business is in profit, which can take some time. Therefore, unless you have a substantial pot of money put by, you may well want to consider investment to help you start-up.
Businesses also look for money at other times in their business cycle. The mistake many businesses owners make is to wait until they’re desperate for money, which is the worst possible time to apply for funding. Investors and lenders look for evidence that you know how to manage your finances and keep a close eye on money coming in and going out, in the short, medium and long term. If you’re doing that effectively you should be able to anticipate the opportunities and threats. A crisis suggests you’ve failed in that essential job. So, I recommend that you plan for the new financial year by considering what your funding needs are likely to be.
If you find you do need money, your most appropriate funding will depend on why you want it:
- To grow. In most sectors businesses will grow far more quickly if they are able to invest in the best equipment and people, or in their marketing to reach new customers.
- To manage cashflow. Even when business is generally good, there will be times when cashflow is challenging, (such as the crisis we’re currently going through). Sometimes you will be able to anticipate this, other times an event will cause a sudden drain on your resources.
- To manage late payment. In some sectors this is not a problem, in others, customers expect to be offered 30 or even 120 day payment terms. You may then find yourself having to pay suppliers and staff long before you get payment yourself.
You should then consider which of the three funding options works for you:
- Grants or loans from the Government (local or national). Grant eligibility will depend on both your region and your sector. They may also take into account your personal circumstances. Grants don’t need to be repaid and loans from the government often come with attractive terms, such as very low interest rates or no personal guarantee (PG). The Business Bounce Back loan, for example, is very quick and easy to apply for and repayments don’t start for a year. The interest rates are then very low. Check online if you’re eligible for any grants or Government loans, as these are the most cost-effective way of securing funding.
- Debt – This is a loan and you need to repay the money with interest. The interest rate will be based on the perceived risk the lender is taking. The lower the risk the cheaper the loan. The debt can be secured on company assets (usually property or machinery) and it is often conditional on a PG being signed by the Directors. This guarantee overrides the fact that a company is ‘limited’. It means that you are personally liable to repay the debt.
- Equity – This is where you give a funder shares (equity) in your business in exchange for money. You do not need to pay this money back, but you will have to consider this shareholder in future decision making. They will take a share of all future profits and a proportion of the business if and when you sell it. Sometimes investors will protect their investment by setting conditions.
How much of your own money and assets are you willing to risk on your business? Many people, for very credible reasons, want to limit that risk so avoid taking on debt where they’re required to sign a PG. If that’s you then equity investment is the most likely option. In this way you share the risk.
Investors come in three main forms:
- Venture Capitalists are looking for companies who are expected to grow quickly. They are professional investors and managing the investment on behalf of others. They are not interested in small investments (minimum usually £1m).
- Strategic Investors invest in companies for strategic reasons, such as access to technology. Amounts can vary hugely.
- Angel Investors are individuals, or groups of individuals, who invest comparatively small sums and take higher risks, without immediate expectations of returns. They’re typically only suitable for start-up companies.
The Banks are not the only, or even the best place, to get debt funding. You should shop around to look at rates of interest and the conditions of the loans. Lenders typically have a sum of money they need to lend out every year, as well as a set of guidelines for their managers to follow when reviewing applications. Whether or not you’re successful will partly depend on how much money they still have to lend and whether you tick their boxes.
If you’re a start-up and only need a small amount, you may also want to consider friends and family. However, do ensure you put the debt and the repayment terms in writing, so that there are no misunderstandings.
Very few businesses prepare properly before applying for funding. You should be prepared to be asked for the following:
- Your latest annual accounts (if you’re more than a year old)
- An income forecast based on previous sales or research if you’re new
- Detailed costs
- Monthly breakdown of profit (or loss), using the above
- A SWOT analysis of your business and the sector you’re in
Anyone considering investing in your business will score an application by reviewing the following:
- Character – What’s your story? Have you already proven your business aptitude? Do they ‘like’ you? Do they trust you?
- Capacity – Can the business repay its debts? You’re asking an investor to trust you. If you have CCJs or late payments you will struggle to get funding.
- Capital – Have you got money, what does your balance sheet look like? Unless you’re willing to pay extortionate interest charges, no-one wants to invest in a business that’s struggling, unless there is a sound reason (like a pandemic) that the business is in trouble and that will be resolved. Even the Government’s bounce back loans attached the condition that the business had to be viable.
- Conditions – This is the commercial landscape in which the business is operating in. All businesses need to adapt to survive. At present the business world is changing very rapidly, investors will expect to see that you acknowledge that in your business plan and are not clinging to past successes.