Quality and flexibility of funds is a crucial element of starting a new business. For entrepreneurs the right type of investment can make all the difference. This is a guide to help you identify various funding options that might be available to you. This can be a cash injection to help your business grow or options to steady the cashflow, ensuring that your business always has sufficient funds at its disposal.
This guide does not give definitive legal advice, it is provided to help give you an overview of the issues you may encounter and provide contact details to specialist area authorities.
If you have gone through the process of planning out your business you should have a clear idea of how much money it will take to start your business, this will vary for each business. Depending on your business model, there are several options available which are detailed below.
Examples of the types of funding to consider:
- Equity finance where you would sell a share of your business, i.e. Angel Investors and Venture Capitalists
- Debt finance where you borrow money from a lender who needs to be repaid, i.e. personal and business loans and overdrafts
- Grants where you would be given a sum of money by government or other organisation for a specific purpose, i.e. the Guernsey Venture Challenge.
It is important that you choose the method to suit your situation and take the time to research the different options available.
Personal / Family Funding
Also referred to the three 'F's - Friends, Family and Fools, this option is can be most suitable at the very early stages of development when the risk is more likely to be high. If you have been planning your business for a while you may have saved up the initial investment you need into the business. Or you may be lucky enough to have a family member or friend who is willing to loan you the initial investment needed to start or grow your business - in this case it is important that you identify and explain the risks of their investment to them as well as setting out a written agreement between the two parties clearly stating the terms, like duration of the loan, interest rate and monthly / weekly / quarterly repayment amounts.
Guernsey Venture Challenge
The Digital Greenhouse, in partnership with Blenheim Chalcot, has launched this fully funded accelerator for new businesses based in Guernsey that are looking to scale. The challenge offers grants to support local startup businesses, giving them the opportunity to attain early state funding to accelerate their development and help them become established. To find out more follow the link:
Business Overdrafts
If you are not looking for an initial investment but your cash flow forecast highlights that you will make a loss before starting to make a profit, for example you may need to buy in stock to sell, then you may look to take out an overdraft. Overdrafts provide a safety net to fund everyday expenses, however they have higher interest rates than loans. The benefit is that you pay interest on the money that is overdrawn, not the full amount of a loan. Make sure to check the terms of the overdraft when looking at the different options available, especially the repayment terms. Overdrafts are a great option for short term finance and as emergency funds; however, they are expensive when money is drawn over an extended period of time.
Business Loans
If you are looking for a set amount of money to start or grow your business a loan might be a suitable option to take, allowing you to pay it back over a set time frame. Before making a decision be sure to research the options available as different companies will offer different interest options, be sure to choose one that suits your needs. If you choose to take a loan make sure to add the monthly repayments into your budget and your cash flow forecast. The monthly repayments have to be comfortable for the business, therefore it is important to ensure that the monthly rate does not push the business to its financial limits.
Private Investment (Angel Investors / Venture Capitalists)
If your business requires a larger amount of finance you may look to approach an Angel Investor (wealthy individual) or Venture Capitalist (investment firm focusing on small/ early stage business), for investment. Both of these will often take out shares in the business in place of their investment, so you will give away some control and profits of your business to the investor. Before approaching an investor you should have a full business plan written out highlighting the potential return for investment and be clear about what percentage of the business you are willing to give over.
Think you would like an Angel Investor? British Business Bank recommends considering these questions:
- Are you a profitable early stage business?
- Can you demonstrate consistent annual turnover?
- Are you seeking between £15,000 to £500,000?
- Is your business growing or has a clear plan for growth?
- Are you willing to hand over a share of your business?
- Are you willing to work with an Angel for three to eight years?
Other Funding Options
There are other less common ways of funding the start of a business including options like crowdfunding where individuals will pay money for ‘rewards’ such as early access to products. Each crowdfunding platform will have specific terms and conditions so make sure that you check whether it is suitable for your business circumstance before you choose this option.
Another way of accessing funds quickly is invoice finance, where you can draw funds against your outstanding invoices. A great option to guarantee steady cashflow no matter if your business is already established or in an early development stage.
Finance solutions to support SMEs and Start-ups
Capital Bridge LimitedFurther Reading
Ready to Launch? article:
The Digital Greenhouse spoke to Nick Gregg, Head of Investments at Blenheim Chalcot, to help you navigate funding with valuable tips for securing investment.
Pitch Perfect! How to Secure Investors for your Business Venture article:
The Digital Greenhouse discussed accessing finance with Blenheim Chalcot and TEKEX at Global Entrepreneurship Week 2020.
