How to fund your business and keep equity

When funding your business, there are many different routes to go down and different things to consider. One of these things is how your funding method affects the rest of your business, or how it could operate in the future.

Funding from investors requires giving them some equity in your business; they have a stake in it, and depending on the terms you’ve agreed to, this means they have a say in how it’s run. If you’ve made a bad investor decision, this can mean a complicated – and expensive – process of buying out their stake in the business.

Here are ways to fund your business whilst still keeping equity.

Start Up Loan

A Start Up Loan, such as the ones offered by us at Virgin StartUp, provides you with a government-backed personal loan to start your own business, at a lower rate of interest than many other loan providers. You pay back this loan at a fixed rate over time, and there are flexible options to find the best way for you to repay it.

To apply, you register online with our system and give us some initial details. Someone from our team will call you in a few days and discuss next steps. These usually involve booking you onto a workshop to learn more about business plans and financial forecasting, where you’ll find out more about how to put in a successful loan application, and putting you in touch with a business advisor who can help you put together a business plan.

Once your business plan is ready, you’ll submit it to us and it will either be approved – hooray! – or if your business plan isn’t quite there yet, you’ll be told to work on it a bit more and come back to us. We love to say yes, but we’re also conscious of the challenges out there; we don’t want to approve businesses we think aren’t ready yet, and set them up to fail.

It’s not all about the money; with a Virgin StartUp loan you’re also matched to a mentor who’ll give you invaluable business advice and help you get to the next level.

Good if: You’re looking to start your own business and want a low-rate business loan that can be paid back over a flexible amount of time, or if you need a small amount to start up – or to get to the next level.

Bad if: You’ll have difficulty paying it off, eg your business is a free app that will take months – or even years – to monetise.

Awards

Winning a business award can win your business both prestige and a cash prize, as well as other support and publicity (for example, the Nectar Small Business Award gives you 50,000 Nectar points to spend in Sainsburys, as well as a crash prize). Some UK awards for small or medium enterprises include:

-          The Growing Business Award

-          Santander 60 Second Pitch Award

-          Nectar Small Business Awards

-          Shell LivewWIRE Awards

-          Digital Entrepreneur Awards

However, awards are fiercely competitive and will require a lot of preparation and investment of your time. You might also have to pay to enter some (though this can mean that there are less entries overall). To have more success of winning, go for smaller, less-publicised awards, and look closely at past winners and their successful entries (if possible).

Good if: Your business operates in a niche industry, you have a story that genuinely makes you stand out from your competitors, or if winning the award will make a massive difference to your business.

Bad if: Spending the time working on your award entry will take too much time away from your business development.

Government grants

Government grants are sums of money awarded to businesses that don’t need to be paid back. They’re awarded usually for specific projects or purposes, rather than as a general lump sum for business development. The amount of money will often need to be matched by yourself, and the money is unlikely to be enough to be your only source of funding. There are also likely to be conditions on the grant which state how it’s able to be spent.

The grants available to your business depend on many things, such as business size and industry. Some industries, such as renewable energy and technology, have more funding available than other industries. However, like awards, grant funding is very competitive. Find out more about government grants here.

Good if: You need funding for a specific project, or if your business operates in an industry where there’s lots of funding available.

Bad if: You need more generalised funding that can be used for a variety of purposes whilst starting up, rather than having to be spent a certain way.

Crowdfunding

Reward-based crowdfunding, using platforms such as Kickstarter, can help fund your business using the power of your audience. It’s also a fantastic way to validate your business – what better seal of approval is there than dozens, hundreds, or even thousands of people who like your idea so much they’ve literally committed sums of money to it before it even exists?

It might be difficult to come up with rewards if your business isn’t a product, but get creative. Rewards could be personal thank you notes for small donations, access to your product or service before anyone else,  a discount code (even a lifetime discount code for large sums), or a consultation. Have a look at successful campaigns to get ideas.

Bear in mind that crowdfunding is a big commitment. To make your campaign work you’ll need to dedicate a lot of time to it – crowdfunders often say it’s a full-time job to do properly, with campaigns involving a lot of preparation before their launch. And if your campaign doesn’t hit its target, a failed crowdfunding campaign attached to your business’s name will lurk in Google forever, possibly hurting your reputation.

Good if: You already have a fanbase or audience, or if you have the time and resources to widely publicise your campaign.

Bad if: You haven’t done your research about the demand, you haven’t planned out the campaign properly, or you’re not ready to shout about the campaign for the duration of it and share relentlessly across all your social media platforms.

Bank loan

Getting a business loan from the bank is one of the more traditional methods of funding a business. You pitch your business idea to a bank, provide them with a business plan and show how you mean to repay, and – hopefully – they give you the cash.

However, in recent years banks have tightened restrictions on lending to smaller businesses, as to make a good case you’ll need to provide solid financial records – which startups, if they haven’t started trading, might not have.

Generally speaking, it can be difficult for small businesses to get a business loan from banks due to this wariness, making bank loans a better option for bigger businesses that need a major cash injection (over £25,000). Be sure to read the small print and look at features such as interest rates – are these fixed, or will they change? If you have a ‘repayment holiday’ (a grace period where you don’t need to start repaying it right away), will interest still be charged on this?

Good if: You’re a more established business with a financial track record.

Bad if: You’re a very early stage startup, or at the ideas stage – save your time and use it to develop your business a bit more, or to look into alternative funding.

Personal savings

Using your own funds, or borrowing from family and friends, isn’t an option everyone has the luxury of taking. However, using your own savings means you can use the money however you want, and borrowing from those close to you means you can negotiate the terms of repayment. The risk with borrowing from friends and family is not being able to pay them back if something goes wrong, damaging your relationship with them. Ensure that everyone involved is conscious of the risks, and write up contracts that state the terms of the lending to avoid stony-faced scenes at Christmas, or Uncle Jim suddenly demanding equity when you hit the big time.

Good if: You’ve been saving up for your dream, you’ve come into some money, or your family is willing to take a risk on you – and can afford to lose the money.

Bad if: You haven’t thought through the ramifications of borrowing money from friends and family, haven’t informed them of the risk, or you’ve pressured them into it.

Bootstrapping

Bootstrapping is the hot term in Startup World right now, popularised by the Lean Startup model. Essentially it means creating a minimum viable product as soon as possible, getting it out there and using it to make money, and putting this money right back into the product. This money can then be used to refine the product, helped by feedback from users of the original product, helping you to turn it into something that really meets your customer’s needs. Put simply, it’s the opposite of hiding away your product until you feel you’ve got it absolutely perfect.

Good if: You don’t mind things taking a little longer, you’re close to creating a minimum viable product, if you know your product meets a baseline of quality and won’t damage your future reputation or put people off. Also good if you’re still working and not ready to give that up.

Bad if: You’ve already got a lot of momentum and need things to move fast, or if your product is one that won’t generate cash straight away (eg an app or platform that depends on advertising revenue or in-app purchases).

 

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