So…business plan is going well, and your idea seems to have feet but you face a major problem: You need money to get it off the ground! Yep – you and a million others! It’s a big problem and sadly I don’t have all the answers but I can outline the basic sources… so make sure you have investigated all your options.
The most appropriate way to raise funds will depend on how much you need, what it’s for and the risk and return involved so do your research and get the best match for your needs.
Methods of fundraising from large to small:
I should also mention corporate bonds but they are for larger businesses covering substantial figures – not really appropriate to you (my audience) so I am not going into them.
Banks and building societies
Can cover various amounts depending on the size of the business and situation. It involves an application for a loan submitted to the bank who then decides if they will lend you the money
Pros: Tried and tested method with (usually) very transparent terms and conditions
Cons: Hard to secure, financials and a good credit history required
Examples: Any high street bank or building society
Tax incentives: None
Venture Capital Trusts
To qualify for tax relief you can only get up to £200,000 per annum
This is where a trust Invests indirectly in a range of small higher risk companies whose shares and securities are not listed on a recognised stock exchange.
Pros: There are VCT companies out there looking for companies to invest in and it is a tried and tested method offering the incentive of tax relief to potential investors
Cons: Must be approved by HMRC and various conditions have to be met
Examples: Downing, VCT brokers
Tax incentives: Yes – no tax on dividends from VCTs, income tax relief of 30% of the amount invested, Capital gains relief (very brief summary; there are rules & qualifications to note)
Crowdfunding & peer to peer lending
Varies per site, usually from £5,000 to 250,000 but can be for larger amounts.
Individuals or companies can invest funds in return for a share of equity in your business
Pros: Removes the risk of having one main investor, also the individuals investing may act as advocates and supporters of the business… acting as PR agents on your behalf.
Cons: More admin involved as more investors to communicate with
Examples: Banktothefuture.com, Crowdcube, funding circle, Seedrs, Kickstarter and Zopa
Tax incentives: Possibly – many of the projects may qualify for EIS or Seed EIS schemes and entrepreneurs relief
Business Angels
Depends on the project and the Angel how much you can get but usually below £500,000
You offer shares in your company for money from an Angel(s).
Pros: It can be a cheaper method and you could find an Angel with expertise in your industry who may add value as well as a cash injection. They are likely to be much more ‘hands-on’.
Cons: Depending on the funds you require you may end up giving a significant share of your business to an Angel. This can cause issues with control and strategy. You may not want a hands-on approach from your investor.
Examples: Angel CoFund, Angelsden
Tax incentives: Possible qualification for EIS, Seed EIS and Entrepreneurs relief.
Grants
The availability and amounts vary with industry and political agendas
Government bodies and charity groups or industry bodies reserve funds for specific grants which individuals or businesses can apply for; usually focused on innovation, energy saving and job creation.
Pros: Possible to obtain resources or funding at nil cost
Cons: Hard to find, process and conditions can be complex and confusing
Examples: www.innovateuk.org and various listed at www.gov.uk
Tax incentives: Depends on the type of grant
Employee Share Schemes
Usually smaller amounts £5,000- £50,000.
You offer employees the option to purchase shares in the business.
Pros: Improves employee retention, may help to improve employee productivity, low cost compared to other forms of finance, keeps the investors in-house
Cons: Need approval from HMRC, lots of complex rules to negotiate and one scheme may affect the use of another, so the tax side needs to be looked at in detail
Examples: Enterprise management scheme, Share incentive plans
Tax incentives: Yes – varies depending on the scheme selected
And thats it… oh wait one more, good old friends and family. Helps if they are wealthy obviously
Good luck!
