How to raise investment for your business
When either starting a new business or trying to expand a current business you are likely to require financial investment.
Raising investment can be difficult and the idea of having to do it can feel quite daunting, but there are many different ways a business can raise capital. Capital simply refers to the money that is used to finance a business.
However, before you consider the options available for raising investment it is important that you analyse your current situation. To do this you need to clearly establish:
- How much capital you need to raise
- What your current business revenue is (if any)
- If you are starting a new business you must decide whether you are willing to use any of your personal assets as security towards the capital – this is risky but does make securing capital easier
- If you own the business premises - this can also make securing capital easier
- If you are willing or not willing to sell shares in the business
What are shares?
There are several different categories of shares but for the purposes of this article we shall refer to two, namely equity shares and preference shares. People who hold equity shares can vote and voice their opinions in AGMs (Annual General Meetings) as well as take a share of the company's earnings, profits and losses. Individuals with preference shares do not have a say in the business and earn fixed dividends. These are a predetermined portion of the company's earnings.
Prior to committing to a method of raising capital it is important that you plan for your business's future in order to limit the risks. You should start this process by drawing up a budget, which should include initial costs, sales and expenditure forecasts and your predicted cash flow for each month. When producing a budget it is important that you are realistic as sales may be lower than expected or costs may turn out to be slightly higher than predicted.
From your budget you should be able to calculate the amount of capital you need to raise and when you will need it. Additionally, it is important that you factor in a contingency fund to help with any unexpected issues.
Once you have decided how much capital you need to raise you should try to arrange all of the financing at once. This is because asking an investor or a bank for more funding just a few months after your initial request may look a bit suspicious and that might start to trigger questions about your judgement. Also, if you are planning to raise more funds a couple of years after the initial investment for another development boost it is better to start planning for this earlier and way before your financial situation becomes urgent.
Methods of raising capital
There are many ways to raise capital for your business and there are benefits and weaknesses to each. The most common methods of raising capital through third parties are investments, crowdfunding, loans, grants and borrowing from friends and family. The specialist team at Rollingsons have a wealth of experience with investments for new and existing businesses and are able to advise you on the legal implications of each of the different options available.
Raising capital through an investment is where you sell part of your business as equity shares to an investor. This option is available to companies limited by shares. The investor will own part of your business, will take a share of the businesses profits and losses and will have a say in how the business is run. Having an investor on board can open up new doors because they will often bring with them their own experience, skills and contacts in addition to their financial investment. They will be as keen as you are for the business to succeed and you won't have to pay any interest on the capital they provide. However, you will own a smaller share of your business, although that share could be worth a lot more if the business becomes more successful. Additionally, you will have to consult with your investor before making certain decisions which can be time-consuming, but their insight and experience may make this a worthwhile trade-off.
Seeking an investment from an angel investor could be a good choice if you are prepared to give up shares in your business. Angel investors are typically private entrepreneurs who usually offer investments of between £10,000 and £750,000.
A recent phenomenon is crowdfunding which is a process where you pitch to members of the public to donate to, or invest in, your business. This may help you to raise vital funds for your business. Rather than a small number of people investing large amounts, a large number people can instead donate small amounts. You shall have to meet the relevant crowd funding platform's criteria and it can take a lot of individual donations to reach your desired investment goal.
There are two methods of crowdfunding, the most common of which is reward based. Reward based crowd funding is where you are not offering the crowd a share in your business, but they are able to pre-pay for a product often at a discount, or are offered some freebies or some kind of perk in return for their investment. The other form of crowd funding is equity based and is where individuals will purchase a share in your business proportionate to the amount of their investment.
Approaching a bank for a loan is another way of raising capital for your business. Doing so avoids having to give up any equity shares and you can plan the business's future finances with the repayment schedule. However, the amount of interest you have to pay back may be high and you may not be able to get the full amount of capital you need from a bank loan. Also, banks are often reluctant to lend money to businesses with minimal trading history or to start up businesses without the owners and / or directors of the business first entering into an agreement to personally guarantee the business's debt to the bank.
Grants are one of the most sought-after ways of raising capital and there are many different grants that you might be eligible for. Grants are likely to be available only to limited types of businesses, depending on what you are seeking to do. For example, if you are able to show that your business will encourage participation in sports in the local community, you may be able to source a grant provider to apply to.
Grants are a desirable way of raising capital because you retain full control of your business and you do not have to pay the money back or give away any equity shares. However, you are unlikely to find a grant that will cover all of your costs, but the money should at least help your business with the overall expenditure. Additionally, the application process can be very time consuming and could easily end in disappointment if it is not successful.
Friends and Family
One of the most cost effective ways of securing capital is to ask family or friends for a loan as they are more likely to support your business ideas. If you go down this route it is important that you clearly establish the conditions of the loan, how and when it needs to be repaid and if it will be repaid with interest. The agreement made could be more appealing than a bank loan but if your business does not go well then your relationships with the people closest to you could be tested.
Legal implications of raising capital
Whichever method you use to raise capital for your business, there are likely to be legal implications which you should not ignore. Investments usually require a comprehensive legal contract between the business owners and the investor which outlines the equity share and other terms of the investment. When borrowing from friends and family, you might be more comfortable having the terms of the loan formalised in a legal agreement.
The experienced specialist team at Rollingsons will be able to advise you with the legal process of an investment. We do not give generic investment advice, but instead give legal advice on the rights and responsibilities or investors and investees. We will be able to provide impartial advice on the legal implications of an investment agreement and also draft the terms of an investment or loan agreement. For the investment relationship to work effectively, both parties need to have a clear understanding of what they are agreeing to and what is expected of them during the agreement. For more information or to arrange an initial consultation, please contact us on 0207 7611 4848.