With small business owners increasingly disillusioned with traditional bank borrowing, Edward Wade, of insolvency practitioners Wilson Field, outlines four startup funding options available to entrepreneurs in 2018.
Financing is arguably the most crucial parts of setting up any business. For a lot of new business owners, it means turning to a bank loan, self-funding or asking friends and family. But sometimes, a conventional bank loan simply isn’t the right option, or perhaps asking for money from friends and family is deemed too risky.
This could be down to repayment terms, or even worry of the business failing. When this is the case, it might see like there’s not much a business can do, however there are other sources of finding investment.
Take a look at some of the alternative startup funding options below:
Angel investors normally invest early into new startsups in exchange for a percentage of the business. When it comes to acquiring angel investment, the hardest part is often just getting sat down in front of them.
However, normally the investment is much more than simply money going into the business. They will often provide strategic experience, so that they can provide a tactical benefit to the company they’re investing in.
The majority of angel investors are looking for a healthy return on investment and will normally look to have their money returned as soon as they can.
It’s important for business owners to recognise the difference between angel investors and venture capitalists. Angel investors are usually singular investors, whereas venture capitalists are firms or companies which use other people’s money. They raise that money by offering investors a chance to take part in a fund that is then used to buy shares in a private company.
New startups, which are considered to have both high growth and a potentially high level of risk, are normally the types of businesses which will see venture capital investment.
Venture capitalists usually expect a high return on their investment as well as share from with the company. It means that the relationship between the business and investors can go on for a lengthy period of time. As the initial investment doesn’t have to be paid back like a traditional bank loan, it will normally be a few years before the venture capitalist will see a return on their investment.
Because angel investors tend to be individuals the amount of money they have available is normally different to venture capitalists, who will normally be able to put more money behind a business, even if it deemed riskier.
Invoice financing is an option best available for businesses looking to grow, but are struggling to get outside investment. Effectively invoice financing allows the business to obtain an advance based on the value of outstanding invoices. For B2B companies, this means a business can get cash to grow the business or invest in the business quicker.
A factoring company would first assess the quality of your invoices and have a look at the potential risk involved. They would then advance you a sum up to a certain value of the invoices available, before collecting the payments from your clients, taking the fees they’re owed and then returning the remaining cash.
As well as advancing cash to the business, it allows owners to spend more time developing the business and strategically planning the next stages of development.
If a business is struggling to raise capital and there has been no outside investment from angel investors or venture capitalists, crowdfunding can be an excellent option to raise the money needed. Crowdfunding works on a collective contribution basis, where business owners put their ideas and thoughts out there, onto an online platform.
From there, owners can invite large numbers of individuals and institutions to invest in the business. Crowdfunding is undoubtedly not the easiest of startup funding options; potential investors have to really believe in the idea and will sometimes be hesitant to put money in unless there is already money behind the company.
There are different means of getting involved in crowdfunding. Some people will invest simply because they believe in the cause, however, this is normally in the case of charities or community projects. Some investors will only put in small donations and depending on the business will normally be met with a small reward from the business.
For businesses looking to raise large amounts of money, there are two main options. Peer-to-peer lending is where an individual will lend money to the business in exchange for financial rewards such as interest on the amount borrowed.
Alternatively, equity crowdfunding gives investors the opportunity to invest large quantities of money in exchange for shares. It works very similarly to angel investment, except it’s via an online platform.
Gaining investment for a business through any means is always difficult, whether it’s via investments or a traditional bank loan. If self-financing your, borrowing from friends or family and going through lenders isn’t an option, then why not look to alternative means of outside investment.
Edward Wade is a technical SEO specialist at Wilson Field
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