Have you ever wondered how to get investment in your business? For many business owners, it’s something they may never think about or want. But depending on your goals, it’s worth thinking about investment or borrowing, as they can help you quickly grow your business to the level you want.
I must confess, this isn’t an area I’m an expert in, so it was great to have a podcast chat recently with Chartered Accountant and founder of Raised Up Finance, Deborah Edwards, on this subject. So if you’d like to learn more about getting funding for your business, keep reading!
There are many different ways a business can grow. But if you’re looking at growth in terms of funding and investment, it comes down to two key things - the speed you want to grow and your attitude to risk.
The speed you want to grow will help determine the choices you make for your business. But your attitude to risk will also play a huge part in your available choices. So if you're somebody who likes taking risks and wants to grow quickly, you’ll make different decisions from somebody who prefers a low risk, slower approach.
So start by getting clear on your ambitions. What do you want to achieve, and what does growth mean to you? Because we think of business growth as being either sales or profits, the number of people or the number of customers. But actually, there's no right or wrong answer - it’s what growth means to you.
And then think about the kind of cash flow you would need. What finances do you need, and when do you need them? This will determine the sources of finance that you’d then go to. For example, if you’re looking to open an office, you’d probably not have all the customers and clients upfront, and you’ll have a lot going out before you have enough money coming in to serve those kinds of costs. So you'd need to think about front-loading your money either through a loan or investment from somebody else upfront and then paying it back later. Those repayments would either be in the form of loan repayments or through dividends and then repaying those investors for their investment in your company.
If you get a loan, you're going to repay that back. But an investor is taking equity in your business, which means they're taking shares, and you’re giving up part of the control of your business. If you opt to go down the investor route, how much control do they have, and what happens if you decide you don’t want that investment anymore? It’s not something to take lightly.
Loans are great and can also be quite time consuming to get. But if you do get them, the repayments will either start immediately or be delayed, depending on what you agree with the loan provider. If you go for investment, you're giving up a percentage of your company and what you're giving depends on how much your company is valued at. If, for example, you wanted £200k and only wanted to give up 10% of your company, you'd have to prove that your company was worth or was going to be worth £2 million. Many companies in very early stages can easily prove they're worth £2 million.
Government tax incentives can also attract investors to your company, and it helps make it less risky for investors, and there are some tax-efficient benefits and breaks for them. The Enterprise Investment Scheme (EIS) is one such scheme, and there's also the Seed Enterprise Investment Scheme (SEIS). Each has different qualifying conditions, so it pays to have a chat with a knowledgeable accountant if you’re considering these.
If growth is on your agenda, make sure you’re partnered up with an accountant who specialises and can help. Traditional accountants can kind of yesterday people; they can tell you what you did in the past and how much tax you need to pay on that. And that's great - but a really helpful accountant will be able to guide you through different funding choices and help you with the forecasting. Because whichever way you go, and even if you’re prepared to fund it yourself or via friends and family, you should always have a forecast. It will help you assess the peaks and troughs of what you might encounter and help put some reality to your vision and ambition. You can use that forecast to help see if the sales you need to make are doable and how long it will be before you make a profit. You can use it as a sense checking tool - is it achievable, is the market big enough to sustain it and what’s the competition like? How does it all fit in with your levels of comfort, risk and patience, and what do you need the business to do for you personally etc.?
Investors are great for bringing expertise into your business - and that’s great if it’s what you want. But you need to be clear on what you’re looking for. Are you looking for your investor to dump the money and run, or do you want them to come and do stuff? Be very clear at the beginning about what the expectation is of the investor. Otherwise, if you're expecting the investor to do some work or help you, and then they don't deliver, you can be stuck with their investment.
Ensure you’re in alignment with the expectations of a potential investor. If you have an investor who's going to be taking a bit more of an interest or can open doors and networks, you want to make sure that that investor has a personality that you can get on with. So particularly in the earlier days, when Keystone Investors are more integral to your business, knowing, liking and trusting that investor is essential because it's a little bit like marrying somebody - you’re legally bound to the ownership of a company. Different percentages of shareholdings have different rights attached to them, but regardless of the rights, it comes down to good manners and general human relationships - you can't ever get away from that.
There are a couple of good companies for this - Seedrs and Crowdcube. They both help pre-revenue and young companies attract investors in a crowd. So you don't often get one great big Keystone Investor, but you will get tens, hundreds and sometimes thousands of investors all putting in small amounts of money. These companies are great in that they also act as a marketing platform; they’ll also help ensure that you’re doing everything right and have fully stress-tested your proposal. And because they're FCA regulated, they can help you do more of the grown-up side of attracting investors and navigating what happens after people have said, yes - because there's quite an intense legal process that you need to go through.
And it’s an excellent way to get money without having the kind of oversight investor. When small investors are putting in £100s, they don’t tend to have as much interest in your company as somebody that’s put in £100k.
The grant landscape is brilliant in some ways, and it’s also really hard to keep up with as it changes a lot. At the moment, one of the biggest, most prominent grants around is the tech grant that HMRC have just introduced. This type of small grant generally helps you in an area, but it won't be the silver bullet that accelerates the growth. There are also staff grants, which are available from HMRC too.
If you’d like to see what’s available, just type ‘small business grants’ into Google and see what's available. Sometimes private companies have competitions, where they'll do grants to encourage green shoots in their industry.
Angel investors and Venture Capitalists (VC) are another option, and you get cohorts of Angel Investors who will come together. There are some quite good ones around, particularly specialising in female-led businesses.
Friends and family funding is another source adopted primarily by those in the very early days of business (and often before looking for an external independent investor). The issue with this kind of business funding is it's all about relationships - and sometimes you just need to be able to have a Sunday roast with your family in peace, without any arguing! Sometimes the pressure of the bank repayments is probably easier, in some ways, than the pressure associated with repaying your friends or family. In the end, the banks are lending you money, and they're charging you interest. It’s a more formal agreement, and the bank can deal with a loss. Whereas with your family, you may be looking at somebody's nest egg, and they can’t afford to lose it. If you decide to go down the family route, make sure you always have a formal agreement and ensure all parties understand their expectations. As a general guideline, if you’re prepared to lend friends and family money, be prepared to see it as more of a gift; getting it back is a bonus. This can make the whole experience a lot kinder and simpler without throwing in the extra stress of unspoken agreements.
It pays to be careful of what you’re self-funding as well. I think it's really easy to end up self-funding, especially in a service business, and if you’re not careful, you could end up with an expensive hobby. You may put in a £100 here, £1,000 there, and suddenly the business owes you a lot of money. And actually, it's not making anything, and you're not paying yourself either. So be very conscious about what you’re putting into the business and almost treat yourself like an investor. Treat your business and yourself as two very separate people. Keep really good records, too, to see how much that loan is building up.
And similarly, price your business to pay you for your work and time. Because if you're not treating your time cost as an expense, it's just another kind of loan, and you're doing it for free. In the early days, you do what you have to do to get your business off the ground - but if it’s been going on for too long, it just turns into an expensive hobby. You then need to ask yourself whether it's got legs in the longer term or if you need to make a fundamental change to make it work.
And no matter how small you are, create a business plan. Many people make business plans because they want to go for a loan or grant but actually do it for you. If you've got something to measure yourself against, even if those targets or timelines are more qualitative, it helps you see where you expect to be and put some sense around what's happening and why.
It makes a big difference. You can see what you want to achieve and what you’re going to do to make that happen because time can go by so quickly. We like to think we're doing all these things when actually, all those things aren’t taking you towards what you want. You can also get very distracted by things that might be good in the short term but maybe taking you away from your growth objectives in the longer term.
It often takes a while to push your business forward, but everything works a bit more easily once it's going forward. And funding and financing your business through that period is critical. Because quite often, if you were to look at business growth on a graph, it isn't a straight line straight up into the air. It's more of a hockey stick where you take a hit in the early days before gaining growth - and that’s OK, as long as you do it consciously.