Many founders think that equity funding is the only real alternative for them and whilst this may be true for many reasons, it is always important to understand and investigate the alternatives to equity. Don’t fall into the trap of thinking that debt finance only comes in the form of traditional overdraft facilities or longer term loans, as in reality it comes in so many different forms. This might include vehicle or other asset leasing, invoice financing, property mortgage, stock finance, and so much more.
The benefit of debt finance, in whatever form it takes, is that you do not have to sell any equity, and decisions as to whether you are eligible or not are normally taken very quickly. It does of course need to be repaid and so has an impact on cash flow. But eligibility is often the problem as most traditional providers often require three years’ worth of trading history, security, and other requirements that early-stage businesses simply cannot normally fulfil. Thankfully there are a growing number of challenger banks and other providers that are now focused on addressing this market and have lower access criteria, although many will only lend multiples of monthly turnover so the sums available can be quite small.
Grants are another source of funding and there are a very wide range available from multiple sources. Even for small business they can range from just £5,000 to many tens or hundreds of thousands of pounds. You do not need to sell any equity or pay them back and they can be seen as a powerful third-party endorsement of your business. However, grants can be extremely time consuming to apply for and with no certainty of success.
Bridging the gap between debt and equity are convertible loan notes or advanced subscription agreements. These are basically loans made to the company by investors that then turns into equity at the next fundraising round. This avoids the need to value the business when the notes are issued as this is only done at the next funding round.
To raise any meaningful funds for growth it is often necessary to sell equity. But where the investment comes from is very important and getting the right funding from the right source will have a long term impact on your business.
It is necessary to consider whether you are just looking for financial investors, or strategic investors or ‘smart money’ that bring contacts and knowledge as well as cash. The amount that you raise, at what valuation, and where from, will all depend on your individual business and the sector in which you operate, as well as the stage that you are at and what the funding is to be used for.
Equity investment will broadly come from one of three sources: business angels / high net worth individuals; crowdfunding; or VCs. Each come with benefits and drawbacks over the others depending upon the direct circumstances and next week we will start to look at each in more detail. Remember that any investment is for the medium to long term and having a good relationship with any investor that has a significant shareholding will make life much easier going forward.
Because so many other factors are important in deciding where any investment comes from there is so much more to consider than just the valuation. Getting the right investment really will make the difference to your business, not just when you raise any funds but for many years into the future.
This series of articles follows themes explored in more detail in my new book, Start-up to Scale-up : what funders expect at each stage Go to the link to pre-order your copy and use the discount code 10off-start-to-scale to get a 10% discount.
9th November 2021
in British English