When it comes to financing your business for growth, you generally have two options; either you use your own funds, or you look at external options to provide additional debt or equity into the business. We consider your options below.
Funding through equity or debt
If you don’t want the complexities that come with spending other people’s money, then you will need to provide the extra funding the business requires. This can come from your savings, or you may borrow from family. The advantage here is that you have complete control over your business, and you retain equity.
You could also borrow personally either by extending your mortgage or taking a personal loan. This can then be advanced to the business. A personal loan will probably come with a lower interest rate, as it is likely the bank will secure the lending against your personal assets.
From an equity perspective, additional capital for the business could be sourced through new investors – from angel investors, private equity, or venture capital.
- Angel investors typically assume a greater risk than other funders, with the expectation of a high return. They often invest at an early stage of a business’s development compared to venture capitalists.
- Private equity investors actively seek to enhance a business’s profitability and operations and seek a profitable exit through either a sale or public listing.
- Venture capital investors, a form of private equity, provide funding together with a strategic focus to the business.
Financing growth by introducing more owners will dilute your equity in the business. New owners may also want to have a say in how the business operates. They may want to be actively involved in the day-to-day management of the business or be part of the governance and sit on a board of directors. Additionally, there is an increased potential for conflict among investors. All of these issues need consideration when looking at additional investors.
Financing through a bank or non-bank lender
Another option is the business obtaining a loan from a bank or non-bank lenders. The Five Cs of Credit (capital, capacity, collateral, character and conditions) have traditionally been used by bank lenders to determine if a potential borrower is capable of servicing and repaying a loan.
Many time-poor business owners lack the resources to thoroughly research all available funding options and, as a result, they often turn to banks. However, if unsuccessful, they may resort to personal finances without realising there are alternative funding options available to them.
Non-bank lenders tend to be more specialised, flexible, and willing to take on different level of risks. They also tend to finance for certain requirements, with options including invoice finance, trade finance, and equipment finance.
While equity and debt are the main funding streams for a business, you should not overlook other funding sources.
Crowdfunding or crowd-sourced funding for example is a funding source popular in certain sectors including tech. Crowd-sourced funding is whereby a business raises money from a crowd of investors through a licensed online platform. One benefit is that you don’t necessarily need to relinquish equity or take on debt. There are different types of crowd-sourced funding models that vary in what the business provides in exchange for funds. Funds can even be given as a donation or in exchange for goods or services. The most common model is equity-based crowd-sourced funding through which a company issues shares to a crowd of investors in exchange for their funds and in return, the investors gain part ownership of the business.
Allowing an employee, or employees to buy into the business could be part of an effective succession plan. It is important to consider this person or people closely to make sure in addition to accepting their financial contribution, you can work effectively with them as part of a team. If they do not work out as a business partner, unwinding the arrangement could be difficult and unsettling for the business.
Grants and incentives
Another source worth exploring is whether there are any grants available from government agencies that could fund growth, exporting or research and development. Grants can be a good source of funding for businesses that meet the criteria, but the application process can be time-consuming and competitive. Using professional assistance when accessing grants will increase your chances of being approved.
Ensuring your business is properly financed is critical to growing your business. Business owners need to have a clear understanding of the most suitable option based on their business stage, industry, business model, and financial requirement.
If you would like assistance in funding your business for growth, please contact your local William Buck Business Advisor.