Attracting funding is still hard for many early-stage businesses. But there is now a compelling range of options, with different models designed to suit circumstances. Christian Doherty outlines what’s available.
It’s the age-old dilemma for any growing business: where can we get the right funding to support the next phase of our journey? Will the bank lend us money? Can we use our assets to borrow working capital? Should we look to bring in equity investors to buy a stake in the business?
All of these questions have in some ways become tougher to answer since the financial crisis, as more sources of funding have emerged to replace the supply of credit that reduced dramatically when the banking crash hit. Finding the right lender or investor is an uphill struggle for many businesses – and if you do identify the type of finance you need, finding a lender is no easy matter.
With that in mind, Guy Bridge started Finpoint in 2014, and has attracted more than 130 lenders across all debt products, from regular banks to more sophisticated debt products. The idea was simple: a free platform designed to bring together all the providers of finance – peer-to-peer lenders, invoice and asset finance providers, crowdfunders and beyond. FSB members can also access an exclusive service through FSB Funding Platform (fsbfundingplatform.co.uk).
“It gives the borrower control of the process and, because we’re a finance platform, we can introduce them anonymously to the lenders, and it’s for them to choose who they speak to and share their data with,” says Mr Bridge. “It’s a secure way of getting in front of a lot of lenders quickly.” While it charges a fee to lenders, the service is free at the point of access to borrowers.
Many small firms’ attempts to find funding will begin and end with their bank – but bank finance can carry conditions that some borrowers find too onerous. Whether it’s a lack of assets on which to secure a loan or not enough of a trading record, bank lending sometimes remains out of reach, either too expensive or not suitable for the business’s needs.
In some cases the banks – or other specialist providers – will offer alternative types of lending. Loosely termed ‘commercial finance’, this can range from invoice discounting and factoring, where the lender advances money against unpaid invoices to aid cashflow, to asset-based lending that allows businesses to release working capital against stock, property and other assets.
The British Business Bank can also point firms in the right direction. FSB recently fed into the British Business Bank’s Business Finance Guide, which sets out various finance options available to firms, ranging from start-ups to growing mid-sized companies. The bank also runs the Start-Up Loans Company, designed to help very early-stage firms borrow up to £25,000 at a fixed interest rate of 6 per cent.
One of the main alternatives to simply borrowing money is selling an equity stake in the business to an investor or number of investors. That option carries the benefit of no repayments on the loan, freeing the business up to invest the finance in new stock or other assets.
Despite only 9 per cent of smaller businesses seeking equity finance, according to research agency BVA BDRC, it is on the rise. Figures from Beauhurst show that the first half of 2019 saw the second-highest amount of investment in SMEs on record. “The amount invested in equity deals grew 15 per cent from the second half of last year, to £4.5 billion,” reports the funding platform.
Certainly, equity finance can work for some. Phil Robinson left his corporate banking career behind to launch Caterpillr, a new platform aimed at helping employers support their staff with childcare costs. Having started up with some of his own savings, he knew he needed further financial backing to take the business to the next stage. “Before I started, I asked myself: what is the unique element of my business and who can I try to work with to open up some funding?” he recalls.
He decided that taking on investment from venture capitalists (VCs) might suit the business best. “The reason for targeting them was not only for funding but also for the network connections that being associated with them has provided,” he explains.
“The main advantage from equity funding is that, although I have effectively sold a small part of the business, I don’t have to service the investment, as I would do if the funding was via a loan. There are certain reporting requirements to fulfill, but they are fairly straightforward.”
Mr Robinson offers three pieces of advice when it comes to VC investment. First, find a firm that deals in your type of idea. “I felt my idea really had a wide social impact so I started to look at investors that have a proper proven track record of investing in social enterprises,” he says.
Second, check whether the fund has a Seed Enterprise Investment Scheme (SEIS) element, and then make sure you are eligible for it. In essence, the SEIS helps investors minimise their risks by offering incentives to invest in young risky companies – if your business qualifies it will open up the number of investors who could be interested.
The final thing to realise is that VCs work on investment cycles. “You need to look at where they are in their funding round,” Mr Robinson says. “If they’ve just closed the funding round and have just raised a fund of £2 million, then they’ll be desperate to employ that capital.”
An alternative to VC firms is angel investment, where an experienced business owner or entrepreneur puts their own capital into the business in exchange for a stake, as seen in Dragons’ Den. Peter Cowley, an associate member of FSB, is one such investor, with a track record of backing technology firms.
“With early-stage businesses I’m looking for an idea and at the people,” he says. “If I invest in a company that values itself at £1 million, that business will take a while to achieve that, so I’m buying into the ability of the founders with the appropriate amount of capital, advice and luck to achieve that.”
It’s vital that entrepreneurs are honest about their business, including any previous ventures. “I’d rather invest in someone who’s failed than a first-time company, as long as they’ve learned from the mistakes that led to the failure,” he says. “Humility and learning can be very useful.”
In recent years, crowdfunding has gone from the fringes to the mainstream, with a number of platforms now hosting millions of pounds in deals – many of them equity-based.
Whether it’s Crowdcube, Seedrs, Funding Circle or Indiegogo, many have now moved beyond niche vanity investments to a viable alternative source of finance. The numbers remain small, however; Beauhurst reported that British crowdfunders invested £92.4 million through 187 deals in the first half of 2019.
Andrew Adcock heads up one of the newest players in the sector, Crowd For Angels, which aims to connect business angels with new investments. It’s an example of how crowdfunding has matured; the crowd isn’t just for tiny start-ups, but is increasingly used by growing companies to attract growth capital. That may be peer-to-peer lending, equity finance (often using SEIS) or even bonds.
He reports that companies typically seeking capital on the platform now are anywhere from six months to three years old. “They typically make a product; that product is probably out there in the market, and it might even be revenue generating,” he says.
And while it’s rare, Mr Adcock reports an influx of profitable companies onto the platform. “That’s really different because you used to just see loss-making or pre-revenue businesses, and now we’re seeing some with a small revenue and even those making a small profit.”
But the crowd won’t suit every business. “It works best for what I call a consumer brand,” he says. “That doesn’t necessarily mean it needs to be a shop selling a goods; it just needs to be a brand that interacts with lots of stakeholders.”
As for how to make a success of fundraising, the advice is clear: “The acronym ‘KISS’ – ‘keep it simple, stupid’ – always seems to play well,” he says. “And, remember, you’re trying to get your business across in a very short amount of time, so don’t just use words; use an image, a video or a graphic to bring it to life. Ultimately, getting the right finance for the business is all about matching your needs to the investor’s hopes.”