Seeking finance for your new venture? Of course there’s crowdfunding, but an array of grants and other funding schemes are also available. The IoD’s Information and Advisory Service (IAS) helps you how to discover which is right for you
Angel investors, venture capitalists, community crowdfunders – the financing landscape for entrepreneurs eager to burst out of the bootstrap phase can be a crowded, confusing place.
Little wonder, then, that the main source of funding for many members of IoD 99, the IoD network for young entrepreneurs, is the ‘bank of Mum and Dad’. More than half – 53 per cent – of members said that money from their family was instrumental in getting their business off the ground, while 45 per cent had borrowed money from friends.
However, there are myriad funding options available – the IoD’s Information and Advisory Service explains the pros and cons of the major ones here…
Use if… You’re aiming to use R&D, work in the ‘green economy’, train new recruits or target foreign markets. The government’s Innovate UK, Green Investment Bank, National Apprenticeship Service and UKTI can all respectively provide grants.
If your business is based in an economically disadvantaged area (such as Cornwall with its high unemployment), you could be eligible for an EU grant.
Avoid if… You aren’t willing to inject some of your own cash, as grants rarely finance a project’s entire cost, usually covering 15 to 60 per cent. You’d need to be patient too – some EU grants take six months to be approved.
Use if… You’re seeking long-term finance. For example, you might want to finance the purchase of a machine or tailor the loan to match the cashflow of the business.
Avoid if… You’re not fond of paying interest rates. These will need to be paid on the full amount of the outstanding loan, usually set at a margin over the bank base rate. This is commonly between two and six per cent (depending how risky the bank deems the loan to be) or a fixed rate, such as 10 per cent.
Use if… You’re prepared to sell a share of your business for financing. Business angels are often wealthy entrepreneurs who provide capital (usually £25,000-£750,000) in return for equity.
Avoid if… You don’t want someone else meddling with your business – they usually require hands-on involvement. You’ll also need a credible business plan and financial forecasts, as well as offering the business angel the prospect of a high return (at least 20-30 per cent over the life of the investment).
Use if… Your business is unable to increase its level of borrowing and needs additional financing. Venture capital firms accept a higher risk than banks,
but expect higher returns.
Avoid if… You’re reluctant to relinquish a significant share of your fortunes, should you become successful. Acquiring venture capital may be expensive too: total costs of 10 per cent or more of the amount raised are commonplace for smaller investments. Also, you should be aware that investment deals can flounder, due to failing to agree a price, legal problems or a decline in trading.
Could the IAS help you?
• The IAS provides IoD members with free business intelligence and advice to help them run their companies more efficiently and successfully.
• The Business Information Service is able to investigate questions on behalf of members and supply them with valuable information ranging from market forecasts and industry trends to trading abroad and employee salaries.
• The Directors’ Advisory Service provides confidential independent advice from specialists on issues ranging from raising finance to board and shareholder disputes.
• Members can receive prompt and confidential business, personal tax and legal advice by calling the IoD’s telephone helplines.