Getting Ready For Investment – Types of Funding Available

EMW

28th June 2018

Typically new businesses will make losses in each of their first three years; even when they do start to turn a profit, the business will struggle to grow from purely reinvestment of some of that profit in the business. It is not surprising therefore that what a business needs during these periods is cash. Fortunately for start-ups, funding is available from a variety of different sources.

Traditionally a company’s main external source of cash was from a bank; debt funding. Today many companies will still have some form of debt funding. Often this will take the form of either:

 

  • An overdraft: a repayable on demand, short-term funding option usually on the lender’s standard terms with minimal documentation requirements
  • A term loan: a facility providing for the borrowing of an ascertained sum (that may be drawdown in tranches) over a fixed period of time
  • An invoice financing facility: often this facility takes one of two forms, either where you sell invoices for a percentage of their full value or where you borrow against unpaid invoices.

 

These options can be particularly useful for providing financial flexibility to young companies who may otherwise have to negotiate some difficult periods in respect of their working capital and cash flow, whilst providing a stronger long-term outlook by having not given up any equity. However, such debt financing does come with its drawbacks; often a personal guarantee or other forms of security will be required by the lender unless your company has some substantial covenant strength, which takes time to build. They can also prove not only difficult to get hold of if your start-up is in its very early stages but also expensive depending on the length of time used and rate of interest secured.

As an alternative to traditional debt funding, equity funding is also available. Equity funding / investment is the process whereby individuals or firms buy shares in a company in return for profit in the form of capital gains or dividends.

Some examples of equity / alternative funding include:

  • Family & Friends
  • Crowdfunding
  • Business Angels
  • Venture Capitalists

For more information about these alternative funding examples, please read the rest of this article here: http://bit.ly/2KhzdPR 

If you would like assistance in sourcing funding, please contact Kirsty Simmonds.

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