Finding funding for start-ups13 Jun 2013
Clive Lewis, Head of Enterprise at the ICAEW, highlights some alternative sources of start-up finance
For those start-ups that have exhausted personal savings, credit cards and family and friends, here are some sources of funding to consider…
Bank finance – overdraft or loans
Banks usually insist on the finance being secured on the assets of the business or supported by personal guarantees or other personal security from the business owner. For loans over £25,000 they will also require a convincing business plan and financial forecasts showing how the loan will be repaid.
Credit unions are non-profit organizations owned by their customers, so loan rates stay low. Once you’re a member you can apply for the loan but, like bank loans, you’ll need to prove you can repay it or use a co-signer.
Some charities such as the Princess Trust offer loans to start-up businesses, usually for specific groups of people such as the under 25s or over 50s. Sometimes they provide finance alongside help such as mentoring or training courses.
Hire purchase, leasing or hiring
Under hire or leasing agreements the asset always remains the property of the finance provider. Hire purchase allows the use of the asset whilst paying for it over a fixed period – which avoids tying up money unnecessarily.
Invoice factoring and discounting
These forms of finance are based on a business selling its sales invoices to a finance provider who advances a fixed percentage of the invoice. When the customer pays the invoice the finance provider pays the balance to the seller less their interest and administration costs. Factoring provides the additional advantage of a full sales ledger and collections service under which the Factor takes on the responsibility for the sellers’ sales ledger. Under an Invoice Discounting service the seller continues to administer the sales ledger and the service is usually undisclosed to customers.
Recourse Factoring excludes bad debt protection. The risk remains with the seller and if the customer fails to pay, the Factor will seek repayment of the amount financed against that debt. If bad debt protection is included, the service is called Non-Recourse Factoring. This means that if a credit-approved customer fails to pay an undisputed debt, the Factor will credit the seller with the amount of the debt.
Business Angels invest in a business by buying shares. The stake purchase is usually between 10% and 40%. They are often prepared to undertake the due diligence themselves relying on their experience to guide them. They usually ask for a seat on the board and to be provided with regular financial information on the performance of the business. They tend to invest in specific business sectors and many have a preference for the sector they made their money in. They can bring significant business experience as well as valuable contacts. To attract a business angel a compelling business plan demonstrating a clear growth strategy is absolutely essential. Business angels will usually invest between £25,000 and £250,000. However syndicates of business angels will invest up to £1 million or more in a limited number of situations,
Private Equity or Venture Capital
For very high growth businesses with a good track record private equity companies will invest amounts from £3 million but more frequently in excess of £10 million. A compelling business plan is absolutely essential. Before investing they will undertake due diligence on past financial reports as well as the business plan. They tend to have preferred sectors for investment and favour businesses with very high growth potential as they seek an exit from their investment (by a floatation on a public market or a trade sale) whereby they can sell their shares within 5 to 7 years.
ICAEW Chartered Accountants can offer advice on start-up and early stage issues such as business plans and access to finance. They can also save entrepreneurs time by helping with compliance issues such as notifying HM Revenue and Customs of commencement of a new business and registering for VAT. The ICAEW’s Business Advice Service (BAS) offers a free, straightforward discussion with an ICAEW Chartered Accountant. Find out more at www.businessadviceservice.com.