GROWING a business usually requires more cash than the average entrepreneur has in his or her bank account, meaning that most companies end up needing a loan, investment or other form of cash injection sooner or later.
It can be hard to choose the best type of funding for your business, especially with the extra complication of the coronavirus pandemic, which has created new sources of funding for struggling businesses, but has also made the general environment more challenging.
Experts say that there’s no one-size-fits-all answer to business funding. ‘All too often, investees take the first offer,’ says Karen O’Grady from law firm Memery Crystal, which works with a number of growth businesses. ‘Sometimes this works, but it can be disastrous.’
Instead, thorough research and understanding of the options helps to ensure that businesses get the best type of funding for them.
What’s on the table?
There used to be a relatively small number of ways to get funding for your business. You could use debt, i.e. take out a loan, or get one or a number of large investors to take a stake in your firm on return for investment (equity funding).
In recent years, new concepts such as crowdfunding have come to the fore, making it easier for companies to go direct to individuals, including consumers of their products, to raise money. In return, they can give away equity in the company, as with more traditional fundraising, or they can give away products — a process known as ‘reward crowdfunding’.
Ben Doltis, founder of PCB Partners, says that companies looking at funding should consider more than just how much money they will get.
‘For a good business, there are many potential sources of finance. The key is to choose a source of capital that adds more than just money, one that offers complementary expertise, market/client access, market credibility and so forth,’ he says.
He says there are pros and cons to every type of business financing, from a simple bank loan to a listing on the London stock exchange, so it’s all about picking the right one for you.
Here are some of the most usual options, together with the pros and cons of each.
A bank loan
Getting an ordinary bank loan is something most business founders understand, and it has the advantage that it isn’t dilutive, which means that you remain in full control of the business.
However, loans can be expensive, and difficult to get for some businesses. Ben at PCB, says they ‘aren’t always best for growth’ and notes that they are really only available to those with stable cashflows, which is particularly tricky at the moment.
Founder and friends financing
Another easily understood form of funding, this involves putting up your own capital to finance your business, and/or asking friends to chip in.
While this type of financing can be relatively cheap or free, Ben says it may be limited and doesn’t come with any strategic help, unlike some other forms of finance. There’s also the psychological barrier created by using your friends’ money to finance your business — it may stop you taking necessary risks.
‘Angel’ investors are individuals that invest in companies that they wish to see grow, often in return for a stake in the business.
While angel investors can be helpful, this can also be expensive in the sense that they will want a big stake, though they may give some strategy direction.
Venture capitalists and private equity
Similarly to angel investors, venture capitalists invest in companies that they want to see grow. They may offer a large amount of support, but are also likely to want a strategy that ends with selling the company, so you are likely to lose your autonomy to an extent. Private equity firms are similar, but tend to invest in more mature companies.
Stock market listing
Listing your company on the stock market — even the smaller AIM market — is an expensive undertaking, though you would retain more autonomy than with a venture capitalist.
There is a lot of expensive regulatory red tape, meaning it could be uneconomic for larger businesses.
The new kid on the block, this is now popular with many types of company. There are plenty of websites that allow you to start a crowdfunding campaign, including Seedrs, Crowdcube and Kickstarter.
There have been examples of crowdfunding being used fraudulently — for example for non-existent cancer treatment or non-working new technology — but it has also been a saviour for many reputable businesses and can bring unexpected rewards.
‘If you JUST want the money, don’t bother crowdfunding,’ says Jes Bailey, crowdfunding expert and the founder of Crowdfund360 (crowdfund-360.com).
‘It is so much work for the money you get in the short term. But if you look at the holistic benefits of crowdfunding and appreciate that it will raise your brand awareness, bring you loyal customers, create brand ambassadors who will support your journey and do word of mouth marketing for you — then it is worth all the work.’
She adds that rewards-based crowdfunding works well if you have a physical product to give away, which also means you don’t have to give away equity in your business.
‘Service-based businesses are better for equity crowdfunding when they want to grow,’ Jes says. The more innovative businesses with clear target markets also work well for crowdfunding.
‘With the 65 crowdfunding campaigns I have run, we have done everything from fashion to sustainable fishing, ebikes to films, and fertility apps to gin distilleries.’
■ Jes Bailey, Founder of Crowdfund360
■ Ben Doltis, Co-founder of PCB Partners, a Mergers & Acquisitions firm
■ Karen O’Grady, Senior Associate – Corporate at Memery Crystal LLP
‘Good communication gives investors confidence’
CECILY MILLS founded plant-based ice cream business Coconuts Organic in 2015, and the product is now stocked by Tesco, M&S and Ocado. ‘About three years in, I knew that to grow the business we’d need cash investment,’ says Cecily. ‘It was always a goal to get into mainstream supermarkets, and to do that takes a lot of cash!
‘We were selling very well on Ocado and in Morrisons stores, so I knew that the market was there. But I also knew that in order to supply the likes of Tesco, I would need to build stock to supply them, and build the brand with consumers.’
Appearing on BBC’s Dragons’ Den convinced her that crowdfunding would be a possibility, and led to the beginnings of the money she needed. ‘Peter Jones declared he felt sick from eating so much. Crucially, I received two offers of investment as well in the Den, and I accepted Jenny Campbell’s offer of the full £75,000.
’However, about a week after filming, I went for a second meeting with the Tesco ice cream team, and they offered me a national listing — this was just the best news ever! It very quickly became clear that the £75,000 from the Dragons wasn’t going to be enough to launch in to Tesco. After much thought, I decided that after all, equity crowdfunding would be the best option and choose to partner with Seedrs.’
The Seedrs launch raised £422,000, much more than the £100,000 originally sought. A second round of crowdfunding raised just over £188,000. In each case, investors received equity in the business in return for their investment.
Cecily says that her success was partly due to having over half of the funds committed before going live. ‘This is called your anchor investor. The closer you are to your 100 per cent funding target when you launch, the better,’ she says. ‘The crowd see you’re nearly funded, so you pique people’s interest and that gets more pledges. After that, you need a strong video, a strong set of financials, and a killer pitch deck.
‘Once you are live with your campaign, it is nearly a full-time job managing it! Good communication from the outset gives investors confidence.’
‘Securing the right funding is the key’
ST PIERRE Groupe, which used to be known as Carrs Foods, owns the Baker Street, St Pierre and Paul Hollywood bakery brands, and recently secured a £6.7m investment from the Business Growth Fund (BGF) and Lloyds Bank. ’We have always been a really ambitious company and the investment was pivotal in helping drive our international growth,’ says founder Paul Baker (above). ‘It’s allowed us to expand the knowledge and experience on our board.’ He added that the company had chosen BGF because it is ‘the UK’s most active investment company’.
‘They also have a base in Manchester, so for us they were a natural first port of call. There are plenty of companies looking to invest in businesses, but understanding how they might work alongside your own is key to securing the right funding,’ he adds.
The next step was to convince BGF and Lloyds that St Pierre was a good prospect. ‘A really good IM (Information Memorandum) is a brilliant starting point. Any business looking for funding needs to demonstrate why investing in it is savvy and safe,’ Paul says. ‘St Pierre Groupe has a unique position in the market and we were growing at an impressive rate.
‘We were prepared to set out exactly why we would grow, how we would grow and what growth would look like for us. ‘It’s a really interesting time for businesses looking for growth funding. Sectors where money might have been considered safe, such as aviation, will be subject to greater scrutiny, whereas industries that have thrived despite the pandemic might see this as the ideal time to compile their business case.’