Here at BrooksCity, we often work with startups and entrepreneurs who are looking to either scale or get off the ground. We help them with a solid business plan and make sure their finances are solid enough to seek funding. Coming up with a great idea for a startup is no easy feat. Getting the funds necessary to grow your venture to new heights even less.
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.
You get to always keep control both on paper and in day-to-day dealings. Should you decide to sell, your payout could be much bigger than if you dilute your equity. With that said, we’ve put together five ways to help you fund your business without having to give up any of it.
Start Up Loans
Are you planning to launch the next great startup or are a small business owner that has been operating less than 24 months? Start Up Loans could be the solution to your financing needs.
Start Up Loans is a government-backed programme funded solely by the British Business Bank. It aims to help entrepreneurs in the UK start a company by providing advice, loans and free mentoring. Each partner in the business can individually apply for up to £25,000 with a maximum of £100,000 per business.
The terms are straightforward and offer a fixed interest rate of 6% p.a. with a 1 to 5 years repayment term and no early repayment fees. Loan recipients also receive 12 months of free mentoring and exclusive business offers to help them grow.
Peer to Peer Lending (P2P Lending)
Peer-to-peer lending (P2P) is a relatively new form of debt financing. It allows businesses or individuals to borrow money without the use of an official financial institution as an intermediary by removing the middleman from the process. This usually takes place through online service platforms that match lenders with borrowers.
It works in a similar fashion to a bank loan; the difference lies in who you are borrowing money from. You pay interest as you would on a business loan and the rates available are often cheaper than what you would get from a bank. P2P lending can be easier to get compared to a bank loan. Although you’re still required to go through a credit check, have a trading record and submit financials, you can get an answer in as fast as two days to see if you’re approved.
Loan sizes can vary from a few thousand pounds up to several million. The UK is one of the leaders in this innovative form of alternative financing and the Financial Conduct Authority (FCA) regulates the industry. The Government-owned British Business Bank is currently lending £80m to businesses through Funding Circle, one of the major peer-to-peer lending platforms.
Asset based financing is a form of debt financing where the loan is secured by the business assets such as stock and inventory, plant and machinery, intellectual property or other balance sheet items. These can be used as collateral to free much-needed cash flow for the business to use. The money is offered as a line of credit to be accessed anytime and paid back when funds are available.
Invoice finance is one type of asset lending but there are several others. This is used by startups and small businesses who sell products or services on credit to generate money against unpaid invoices. It allows you to receive an advance on your earnings without sacrificing equity.
If you want to learn more, you can have a look at the ABFA website (Asset Based Finance Association) where you can also search for companies that offer this type lending.
An overdraft is another form of short term debt repayable on demand that allows you to spend more than your account currently holds. For example if your present account balance is at zero and you spend an extra £10, that means you’re at -£10 which is what you’d call an overdraft.
It’s common for businesses to use such funds to help meet their day-to-day requirements and as the company grows. However, it should not be regarded as a spending limit but rather as a last resort.
Banks usually offer two kinds of overdrafts. One being an Arranged Overdraft which is an agreed upon borrowing limit that allows you to spend through normal payment methods. The other is an Unarranged Overdraft which happens when you spend more than you currently hold in your account without having agreed to it in advance or if you spend over your agreed limit.
Fees and interest vary according to different banks, some even offer interest-free, fee-free overdrafts from £100 to £300.
A bank loan is the most common form of loan capital for a business and works very much in the same way as personal loans. A business loan can provide medium to long-term financing and is best suited for larger operating or capital expenses such as investing in technology, hiring additional staff or expanding operations.
Banks set the repayment term such as 3, 5 or 10 years and the rate of interest, as well as the timing and amount of repayments. This makes them less flexible compared to overdrafts because the business commits to meeting the agreed-upon repayment terms. Business loans need to be secured which means the loan will require the borrower to provide collateral to secure repayment. In the case of a startup, the security is usually in the form of personal guarantees from the entrepreneur.
It’s important to note that it has become a lot harder to get accepted for credit. Businesses with low profitability and cash-flow are often rejected because they are considered more at risk to default on the loan. An accountant can help ease the process and provide up to date financial records of your cash flow, balance sheet and income statement which banks almost always require.