Tips on Funding for a Small Business
Chris Barling, CEO of ecommerce & EPOS supplier, Actinic.
First some background. In 1996 I set up ecommerce provider Actinic with a business partner. We went through a few years of self-funding and borrowing from family and friends before raising £165,000 from an angel investor. Next came winning £1.5m from venture capitalists and finally going public on the London Stock Exchange, raising £25m. Since then we’ve received two major government grants and I’ve become an investor in other companies myself.
Before anything else can be considered, it’s taken as read that in order to raise funds you need to have a workable business (or the ability to persuade people that it’s workable). This must be backed up with a well written plan covering finance and marketing but it must not be too detailed.
Keeping it in the Family
The obvious but often difficult first place to go for investment cash is from relatives and friends. This has the advantage (assuming you know people with significant capital) that they may be enthusiastic about your plans and keen to get involved. The disadvantage is that if the business fails, which is bad enough, you may also face strained or broken relationships. I hope that it’s not too presumptuous to say that if you believe there is no chance of that happening, you probably don’t understand risk and should reconsider your career direction very carefully.
Obviously it’s a very personal decision but I borrowed money from both family and friends to help get the business going. However I’d advise you to take the loans on personally so if the business goes down you would still have to pay people back. I kept my loans at a level that I could just about pay off over a few years.
After family, banks are another natural port of call for funds – after all, that’s where the money is stored. In fact, if your business is successful the bank can be the cheapest source of finance. You just have to repay loans with interest, not with a share of your profits.
The often stated problem with bank loans is that they only tend to be available when you don’t need them. To put a bit more meat on this statement, bank loans yield a relatively small return to banks, so it’s critical for them that they rarely lose money. For this reason, banks want to either loan to companies that are successfully trading already, and are maybe expanding in a controlled way and require more working capital, or they want to have their loan secured against assets. In this second case, it’s very likely to be your house. Since you will lose your house anyway if the business goes bad, it may be cheaper to raise the cash by re-mortgaging, and loaning the money into the business. That way you can pay back the loan without incurring any tax.
It’s also worth investigating the government’s Enterprise Finance Guarantee. Details are available on the Business Link web site. There may also be UK or EU grants available depending on what you will be doing and which area of the country you operate in.
If you are a start up, getting investors to put in money for a slice of equity may be the best bet. The challenge is that investors, just like those on Dragon’s Den, receive numerous approaches, but write relatively few cheques. How can you make yourself stand out?
The following are the key points to remember:
- You must excite investors with the chance to make a lot of money
- You must convince them that the risk is low
- Ideally, you must explain how they will get their profits out
These are the things that they care about. Get it right and investment will often follow.
Incidentally, providing a little hard data backed by evidence will always make you more credible. Avoid over-statements that imply you are a genius or cannot fail as these are a big turn off.
Focus on their Needs
Every investor will want you to focus one hundred percent on the current business, and not worry about alternate ideas or your next move. With regards to your salary, no investor wants you to feel that you’ve made it just because you have got an investment – so they will be looking for you to take relatively little. It’s your job to negotiate a salary that finds the best balance – and to convince the investor that this is the case.
Investors will sometimes ask you to put your assets on the line. I personally have always refused, arguing that I had already taken a pay cut starting the business, risked my career and was utterly committed anyway. Finally I pointed out that such a high price runs the risk of causing the directors to behave desperately if things get tough – which isn’t good for investors. I would suggest that you sharpen these arguments up too.
Once potential investors are thinking of stumping up some cash, they will zero in on credibility.
Credibility comes from having a great track record of previous achievement. The problem here is that if you have such a record, you probably don’t need to raise funds. A way to deal with this problem is to get experienced people onto your board. This will have a cost, probably in shares. You also need to listen to their advice – no one good will stick around if they are ignored.
Clinching the Cash
Remember that the key lesson is to consider carefully the investor’s needs. Only secondly present your need for money and how much sense the business makes to you.
It’s not easy to raise money, and before you even start you must have a viable business and plan. My company presented to over 70 investors before getting our first break. However, if you follow the advice here your chances will be improved. Clinch that cash!