Selling shares in your business, or equity, can help to grow your business much more quickly. You will have the funds and the pressure, and support, from other stakeholders to accelerate profitability. But for those who start a business to be their own boss and fully in charge of decision making, then the price of equity investment is some loss of control. For many business owners, that’s a price they are not willing to consider.
“Choosing between self-funding or seeking outside investors is not a simple decision. It depends on the type of business, its trading record, and plans for growth amongst others. The decision to keep your equity and bootstrap can prove valuable down the road for more than one reason,” according to startup specialists BrooksCity Chartered Accountants.
Think carefully about your business model and goals before ruling out equity funding. For example, if your plan is to sell the business in a few years, then an equity funding model could make sense. But if you want to grow more slowly and steadily and have no intention of selling on then other forms of funding may be a better fit.
Here are 6 ways of funding your business without losing control.
1. Bootstrapping
This means funding the business without taking on any kind of funding. You resource the start-up from your own resources and build up slowly as you make sales. There are many types of business you can start with little or no money these days, see here for some ideas.
2. Start-up Loans
This is a government-backed scheme, operated by the British Business Bank. Loans of up to £25,000 are available along with free mentoring and support. Interest rates are capped at 6% with a maximum 5 year repayment term. Start-up loans are available to small business owners who have been operating for less than 24 months. Partners can claim up to £25,000 each, to a total of £100,000 per business. The loans are unsecured.
3. Peer to peer lending
This is a relatively new form of funding. P2P lending operates via a platform which links borrowers with lenders. P2P is regulared by the Financial Conduct Authority. You will also need to go through the usual credit checks and submit your trading and financial records.
Interest rates tend to be lower than mainstream lenders and funding decisions are made relatively quickly. Funding Circle is the best known P2P lender, backed with £80 million of government funds.
4. Overdraft
A surprising number of businesses use an overdraft facility to fund their start-up and growth. The advantage is that there are no checks and it is very flexible. But overdrafts can quickly become very expensive, so should only be used for very limited time periods, or cashflow humps. If you need longer term funding then an overdraft is not recommended.
5. Bank loan
Bank loans generally provide medium or longer-term funding for new businesses. Those loans will almost certainly need to be secured against assets or a personal guarantee. The bank will also want to see and discuss your business plan and financial forecasts and they will of course conduct credit searches.
Loyalty counts for little in business banking so don’t be reticent in approaching a range of different banks. Ideally you’ll have a choice and be able to select the bank that offers you the best deal, with regard to interest rate and repayment terms. But if you face rejection, keep trying. It can even pay to approach different branches of the same bank.
6. Crowdfunding
There are several types of crowdfunding, but the one most people are familiar with is rewards-based crowdfunding. Kickstarter and Indiegogo are two of the most well-know platforms.
This type of crowdfunding enables you to attract early customers and supporters. You put up a crowdfunding page with a prototype of your product or services, plus a video, and your supporters can make pre-purchases. You can offer a range of rewards alongside the product or service, such as thank you cards, an invitation to the launch event and so on.
Crowdfunding isn’t easy, you will need to put a lot of time and effort into promoting your crowdfunder. But what new business doesn’t need to create a buzz? Crowdfunding can be a good way of raising start-up funds while doing essential marketing and promotion at the same time.
Whatever form of funding you plump for, make sure that it is informed by a thought-through business plan. This doesn’t need to be an elaborate document, but it does need to be focused and informed by a deep understanding or your market and potential customers. Be clear about your business goals and then make sure that you get the level of funding you need to do that vision justice.