28 June 2022
Funding and Asset Finance
For new or ambitious businesses, finding the right source of funding can make or break the future of the company. Startups face a range of choices and challenges when it comes to raising capital but there are certain best practices that can increase your chances of success.
Candice Young explores the funding landscape for startups, the options available and how to choose the right option for your vision and business.
When do startups need to raise money?
Capital is the foundation for starting a business. Ambitious business owners need money to get their ideas off the ground and help them soar. With this in mind, raising money is used for two principal scenarios:
Some businesses need capital in order to fund the service or product provision itself. For example, starting a manufacturing business requires equipment, premises and staff, all of which are expensive. Other businesses may want to raise money for capital expenditure once they’re up and running in order to develop a new product or service, or add new technology.
For pre-revenue businesses, lending is made based on the strength of your business plan, since there is no business to speak of yet.
The other common reason to raise capital is to do more of what you’re already doing, but at a wider scale and more profitably. This might involve investing in new team members or tools, adding new locations or increasing marketing and sales efforts to acquire new business in your market.
For businesses that are already up and running, the challenge is to demonstrate to lenders the existing performance of your company along with your strategy for how this investment could take you to the next level.
What are the considerations for raising money for your startup?
When raising money for your startup, everything hinges on your business plan. This is the foundation for your vision and needs to explain to a potential lender why your business is a worthy target for investment.
Your business plan should consider:
What you want to achieve
How are you going to achieve it - how the capital will be spent including staff, equipment, premises and technology.
How these investments will turn into growth - modelling what your future projects and sales looks like to understand the funding you need to address them.
All these questions will be asked by investors, and your plan should be ready to provide answers, backed up with forecasting data that shows what their investment will achieve.
The goals and timelines in your business plan will then determine the kind of funding you need.
What are the options for funding my startup?
While banks are still the main lender for SMEs, most high street institutions are not in the business of lending to risky new ventures, especially those not yet generating stable revenues.
However, there are a range of options available for exactly these types of ventures, incentivised by government schemes such as SEIS, for seed businesses, and EIS investments, for established businesses, which offer tax reliefs to individual investors who buy new shares in your company.
To qualify for SEIS status, your business must:
Be carrying out a new qualifying trade
Be established in the UK
Not be trading on a stock exchange at the time of the share issue
This enables your business to raise a maximum of £150,000 through SEIS investments in early stages. EIS schemes meanwhile allow your business to raise up to £5 million each year, and a maximum of £12 million in your company’s lifetime
Potential sources of capital for startups include:
Angel Investors: These are usually high net worth individuals that invest in a new or small business, providing capital in exchange for equity in the company.
Venture capital: Private sector firms that raise a pool of money to draw from corporations, foundations, pension funds, and organisations and invest in new businesses.
Crowdfunding: Raising funding for a project or venture from a large number of smaller or everyday investors via an online platform.
How do I choose the right funding option?
Raising money can have long term effects on your cash flow, your credit score, the structure and control of your company and more. Your choice of funding option will depend on several key factors:
Equity finance, such as venture capital, doesn't need to be repaid and is a more flexible and a less risky source of financing. There are no repayments and profits are shared between shareholders, but it also dilutes ownership of the business. This decreases control in decision-making aspects of your start-up, and reduces access to a segment of your future revenue as you share it with others.
Raising money from venture capital can be time consuming and slow, contacting hundreds of funds and competing with other startups in your ecosystem. Additionally, there is no guarantee that you will find a firm to invest in you. In urgent scenarios, you may need to turn to sources you can control more, such as personal connections or crowdfunding in your own network.
Different funding options will specialise in different parts of the business lifecycle - some firms and investors focus on smaller pre-seed and seed investments while others look at helping established businesses scale rapidly. At early stages and smaller amounts, friends and family may be a more appropriate source of funding.
How to prepare your business for funding
As mentioned, every funding journey starts with a great business plan – clear strategies backed up with realistic numbers and predictions are key for persuading investors of your potential. However, not every entrepreneur has the experience or inclination to dig into these numbers with the rigour that investors require.
That’s where an experienced advisor can make all the difference. At Haines Watts, we’ve helped many businesses access a range of funding options to power their growth, with deep experience in:
Forecasting and budgeting
Issuing share agreements
Managing EIS and SEIS compliance
Providing valuations for investors
To find out more about how our experts can help you access the capital you need, get in touch with a member of our team today.