What’s right for my business? Debt, Equity or Crowdfunding?

Taking your business to the next level, no matter your current stage of development, will typically require additional capital. There are a wealth of potential options available, but finding out which are available or suitable for your business and situation can be a bit of minefield.

Richard Altoft, Investment Director in Maven’s Nottingham office, explores three possible funding options.

Debt financing

If you can demonstrate a reasonable cash flow, debt financing may be most appropriate. There are numerous lenders in the market, providing flexible funding options, but the main types are:

• Business loans – These can be unsecured or secured and are typically taken out with a bank. With unsecured loans, the amount that can be provided, and the interest rate you’re offered, will depend on the credit rating and creditworthiness of your business. as this type of loan isn’t secured against your home or business, the amount you can borrow will typically be relatively small. To borrow a more substantial amount, you may consider a secured loan, which can be secured against your home, the stock you’re purchasing or other assets belonging to the business. In this situation you may be able to borrow meaningful amounts, depending on the assets you can put up as security and your circumstances.
• Invoice financing – If you need additional money for cash flow purposes rather than having to wait a few months until invoices are paid, invoice financing may be appropriate. With invoice financing, a third party (invoice financier) ‘buys’ your unpaid invoices from you and lends you a percentage (typically 50-90%) of the value.

There are two types: factoring and invoice discounting. With factoring, the invoice financier takes responsibility for collecting the money owed by your customers. With invoice discounting, the invoice financier lends you money against the value of your unpaid invoices, but you collect the money from your customers as usual. You then use this money as it comes in towards repaying the upfront advance you’ve received. Both types involve cash advance up front, the difference is who collects the debts in later. With invoice discounting, it is the borrower, whereas with factoring it is the lender who has primary responsibility for collecting the debts in.

Equity Funding

Whilst giving up an element of ownership of your business may sound daunting raising equity finance can be the most suitable option for businesses that need funding and expertise to take their business to the next growth stage. Equity funding can help a range of businesses at different stages, but it is typically geared to companies with rapid growth potential. 

Equity investment can come from ‘business angels’ (individual or syndicates of private investors), a venture capital fund or private equity firm, who will take a stake in the business by purchasing some of its shares, depending on the method of investment. Equity investment can be used to buy out existing shareholders, fund acquisitions or provide growth capital, and can range from as little as £10,000 to tens of millions of pounds for larger businesses requiring capital to unlock their growth potential.  The investor may take a controlling stake and is likely to be involved in the day to day running of the business; or a minority shareholding with less hands-on involvement.

In addition, the business receives valuable support from the investor, which otherwise would not have been available, who use their expertise to help shape the company’s growth strategy and are motivated to do this through an increase in the value of their shareholding.

An equity investor will have a clear strategy to build the value of the business over a 3 to 5-year period, and will plan to either conduct a sale process, or exit via an Initial Public Offering (IPO) or share flotation if it has achieved its growth objectives. Equity finance is not appropriate for ‘lifestyle’ businesses but is a highly effective way for entrepreneurs to realise the value in their businesses in a relatively short space of time.

Crowdfunding

Crowdfunding is a relatively new way for small companies to engage online with millions of potential funders to raise funds, by asking many people (the ‘crowd’) for relatively small amounts of money.  A company seeking funds will usually set up a profile about their business or project on a crowdfunding website - sometimes referred to as a crowdfunding platform. The profile includes how much needs to be raised, the share in the business offered, what the money will be used for, and when the investors should receive a return for investing.

This type of funding does of course bring with it responsibilities to keep a large range of (often inexperienced) investors updated and engaged during the investment the business. If the business delivers on its plan, investors could see returns in several ways, including a rise in their share price, being paid dividends, or potentially receiving a finished product or service.

When your business reaches that point of needing to raise funding, which route is the right one to choose?  It’s not easy to decide which option offers the best route for your business and current situation, so the best advice is to do your research, then take professional advice on what option is right for you for your business. It is also likely that over the life of the business it will utilise a combination of the above options, depending on the need at the present time.

Are you looking for funding for your business?

If your business is in need of finance to help unlock its growth potential, MEIF Maven Debt Finance may be able to help. Contact Maven’s local team today to find out more.