Getting the right type of funding for business growth can make a big difference to the success of your business.
The most suitable sources and types of capital for your business will depend on the nature of the project, amount required, type of business, market characteristics, business growth ambitions, size and timing of business cash flow and stage of business growth.
Investing in innovation is crucial to businesses looking to bring new and improved products and services to the market and boost their profitability. During the downturn this is especially important but will become even more vital for businesses that want to grow and become more competitive as the upturn comes.
Minister for Science and Innovation, Lord Drayson, said:
“Accessing funding is vital for any business, whether through grants to support development, loan guarantees or tax credits to invest in scientific and technological research. This No-Nonsense guide will ensure businesses are fully aware of their options, bringing together the information that businesses need to get support and get on.”
Minister for Economic Competitiveness and Small Business, Baroness Vadera, said:
“Innovative businesses will play a key role in the future of our economy so assisting these businesses to innovate and grow is particularly important, especially during challenging economic times.
It is unusual for a business investment to be risk free. The risk profile of any business investment is made up of a number of components of which only some can be controlled by the business but all of which need to be understood and managed. The types of risk a business will face include:
- execution (project).
Different stages of business development process are:
- Pre seed and seed stage: The venture is at the idea stage and needs finance for research and development.
- Start up stage: Product development has been completed and funding is needed to develop production capacity and sales activities.
- Growth stage: The business is established and requires capital to fund growth and expansion. The business may or may not be profitable but is facing a period of rapid growth. Capital may be needed over a number of stages and involve a combination of debt and equity.
- Maturity stage: The business is experiencing stable sales and strong profits and is well established in the market.
- Decline stage: Sales begin to decline and profitability decreases as competition levels increase and consumers move to alternative products. The business needs to reposition or reinvent itself to survive.
Different Business Funding Options
Business funding comes in all shapes and sizes. But, if you have a rough idea on the amount of business funding that you need and the type of investment partner that you’d like to have, you’re in good shape. You can use some guidelines as a general rule to match yourself up with one of the primary sources of business funding below:
Personal Sources: A large number of start-ups are ‘self funded’ either via savings, loans from family and friends, or via existing sources of personal borrowings. Sometimes it can be difficult to raise funds from other sources if your business plan or case is not easily understood by third parties, so personal funding is often the only realistic source of initial funds.
Angel Investors: Angel investors are individuals who invest their own private capital into startups and small businesses. Angels will demand and larger share and more control over the business than your friends and family, but there’s less risk in losing a close relationship if the business goes under. Business angels are usually high net worth individuals with cash resources to invest in a high growth business with potential to offer high returns. The level of risk and involvement in the business by an angel investor will vary from one investor to another.
Venture Capitalists: Venture capitalists are specialist financial intermediaries who seek high returns from investing in relatively high risk companies. These folks are serious full-time investors and demand a much larger share and much more control over your business than any other group Banks. The investment raising process through a venture capital company normally takes three to nine months. A business seeking investment will need to have sufficient funds to continue operations for about 12 months. Venture capitalists often expect higher returns for the additional risks taken.
Equity Funding: This is the type of funding where you are exchanging equity in your business for the funding you require. Equity finance is an important part of business funding for early stage development, growth and to support debt funding. Equity can come from an owner’s funds or external investors. The most signifi cant difference between equity finance and debt finance is that the equity involves the investor taking an ownership position in the business. Investors may take an active role in the business and require a position on the board in order to influence management decisions and the direction of the business. The rate of return (internal rate of return or IRR) sought by equity investors is normally in excess of 25 per cent. These returns are achieved through the sale of the investor’s equity position when the business has grown in value and from business profits.
Debt Funding: Debt is the cheapest form of external funding and is an important source of capital for most businesses. The challenge in debt financing is that it usually must be backed up with some sort of hard collateral Most often this type of funding comes in the form of credit cards and home lines of credit. The most common forms of debt funding include bank loans, overdrafts, mortgages and equipment leases.
Invoice finance provider: Invoice finance allows businesses to ease their cashflow by unlocking value in unpaid invoices. This type of finance can be vital, particularly at a time when cashflow concerns are becoming ever more widespread. In order to derive the maximum benefit from invoice financing, it is important that you choose the right invoice finance provider from the outset – particularly as many will expect you to commit for a minimum of twelve months.
Asset-based Lending: For this type of finance, a lender will look at the total value of all the assets on your register, not just your sales ledger, and advance you a loan based on this amount. Business owners who believe that the growth of their business would be best facilitated by outside investment in return for a percentage of the company are free to consider these financial solutions.
Some of the factors in making an investment opportunity attractive are experienced and effective management, high growth sector, high business growth potential, replicable business model, strong financial returns sales history or confirmed purchase intentions customers and having market knowledge and distribution systems.