How do you fund growth? – updated

I have updated this to reflect experiences I have had with tax relief for investors, peer to peer lending, crowd funding and tier 1 investor visas.

To fund growth in your business, you need to think about how you are going to do it.

Before you evaluate your needs and the available options, you need to ask yourself the following questions:

  • Have you determined whether you have enough cash to fund your existing business?
  • Have you the discipline to control your monthly cash and working capital requirements?
  • Have you evaluated if and when you will need external funding?
  • Have you evaluated appropriate sources of funding?
  • Have you made provision for contingencies?

You need to first identify the disciplines you need to embrace within your company to manage what cash you have, before you consider any external sources of funding:

Control your costs
Be focused on how you spend your cash and;

  • Invest only in what adds value
  • Manage competing demands from within the business
  • Continue to outsource where appropriate
  • Maintain flexibility and avoid long term commitments with property and contracts
  • Fix targets for consumable costs and outsourced provision
  • Set budgets and ROI targets for sales campaigns
  • Track cost of customer acquisition and retention against customer margins

Manage your working capital
Take control of your working capital

  • Set parameters for inventory levels if applicable
  • Agree terms of credit with suppliers
  • Introduce a simple purchase order system to control expenditure
  • Collect your sales invoices as quickly as you can
    Tips:

    • Are you B2B? – agree schedule of payments with customers. Don’t be afraid to ask for an up-front payment if it is appropriate to your business model
    • Are you B2C? – get your payment services provider to pay you daily

Other people’s money
You have made the decision that your business needs more money than it can provide.

Do you know what your goals are; to take your business forward or to another level?

It will help when speaking with potential investors that you have a documented plan that can demonstrate that providing funding to your business will make sense – to them.

On another video I will walk you through the steps needed to follow to create a useful business plan, but for now let’s look at where your funding could come from, outside of cash generated from within your business.

Own assets
Do you have any scope to fund this yourself?

  • can you invest more in / take less out of the business?
  • how much do you need to live on?
  • have you taken independent tax advice?

Business partners, friends and family
Is this a possible source of funding?

  • will they invest in the form of shares or loans?
  • have you agreed terms of repayment?
  • is their clarity over roles and responsibilities to avoid conflict?
  • have you taken independent legal advice?

Angels, and early stage investors
What do you need to think about when thinking about external investors?

  • you will need to offer high returns – any early stage business is risky until you can prove that you can scale the business up in a sustainable way
  • how do you find them? – networking is always the best route, and this will help to raise the profile of your business
  • how do you choose an investor? – avoid any potential for conflicting goals and objectives.

Government grants / support:
There may be some scope here for some support.

  • are you eligible for R&D tax credits? Up to 230% relief is available and the government will pay you tax credits even if you are loss making.
  • could you be eligible for a UK grant? – be warned though that these are limited in terms of amounts available and are not available to London based businesses.

Banks and institutions
How do you secure a sensible offer?

  • you will need a track record of profitable trading to raise anything significant.
  • variety of options are available:
    • Overdraft
    • Sale and leaseback of assets (including IP)
    • Invoice discounting and factoring
    • Revolving loans
  • banks will want security and proven ability to repay any funding.

Peer to peer lending
This is a credible source for the right business with the right profile.

  • as with banks you will need a track record of profitable growth.
  • they will be loans, terms dependant on the company’s ability to repay any funding.
  • do some research to select the right platform – to avoid wasting time.
  • security may be needed – normally a personal guarantee from the founder, but it can also be company assets if you have enough scale.

Crowdfunding
What do you need to do to make yourself attractive to potential investors investing through crowdfunding sites?

  • do your research and select the right platform for your business.
  • get your content, text and all relevant information in a user friendly but informative form, including a business plan, financial projections and other relevant documentation.
  • make it visually appealing and create an engaging video.

Venture and Private Equity capital
What are the criteria conditions to satisfy this more sophisticated group of investors?

  • only available to an established business with a track record.
  • size and prospects for growth will determine whether a VC or PE option is a credible solution.
  • as with any external investor choose any provider carefully to avoid any potential for conflicting goals and objectives.

Public offering
This means listing the business on AIM or another share exchange.

  • you will need an established business with a track record and the prospect of reaching some scale in terms of revenue and profit either through organic growth or by acquisition.
  • expensive and time consuming to deliver, with no guarantee of success.
  • people and infrastructure will be needed to deal with increased compliance requirements.
  • managing more shareholders becomes even more burdensome.
  • qualified advisers and underwriters will be needed.

Tax relief for investors
Tax reliefs are available to individuals who invest in certain companies, social enterprises, or Venture Capital Trusts.

  • the government offers schemes that offer tax relief to investors to encourage them to invest in private UK companies.
  • seek an advance letter from HMRC to show that your company and any share issue meets the relevant conditions for the relevant scheme.
  • there are limits in terms of amounts, activities and whether this is connected to family members.

Corporate Finance Advisers

If you can raise external finance you should consider engaging an experienced adviser, who is registered with the FCA. They should be well networked with institutions and investors and have experience of raising funds for businesses like your own. Before approaching anyone consider the following:

  • do they understand you, your business and your goals and objectives?
  • do they have strong references, or have they been recommended to you? – always a good idea to talk to similar clients they are working with.
  • are they a credible source of potential investors and ultimately exit strategies? – again explore this with nominated references.
  • you will need to pay them – so think through how this would work.

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