How To Fund Your Business1

How To Fund YourBusiness

Guide on how to fund your business in thein the current economic environment.

`© Copyright 2013 | arinobe.com

             How To Fund Your Business2

Table Of Contents

Self Funding

Friends & Family

BootstrappingInvoice FinanceLeasing

Business Angels

CrowdFundingRewardEquityLoan

Banks

Seed Funding & Support

Government grants and loans

Venture CapitalStages in Startup Funding

Idea PhaseDevelopment PhaseSeed PhaseAngel PhaseVenture Capital Phase

`© Copyright 2013 | arinobe.com

             How To Fund Your Business3

Introduction

The rate of new businesses registrations has rapidly accelerated in the UK over the pastfew years. It is estimated that a record 500,000 businesses start in 2013, with this numberset to rise in 2014.

One of the first challenges of any new business owner has to face is how to fund theirbusiness.

This white paper will take you through the most popular ways to fund your your businessand will provide an analysis of each.

Self Funding

60% of businesses are started with capital injected by their owners. It is advisable to start

off your business with your own money, even if you want external finance from a businessangel or bank in the future.

It is simple, if you believe in your business, you will invest in it.

Investors will be reluctant to invest in a company where the owner has not invested some

money.

Do not risk your overall financial well being on your business, but you should be prepared to

invest. Keep a track of just much of your personal money you have put into your ownbusiness.

Friends & Family

About 10% of startups are funded by friends and family as it is a lot easier to get moneyfrom them as they already trust you. The main drawback is the added pressure that comesfrom getting money from people that you know personally.

When receiving money from family and friends its always a good idea to get an agreementwritten down so everyone is clear. It should be clear whether the sum of money is a loan orequity investment, this avoids confusion in the future.

`© Copyright 2013 | arinobe.com

             How To Fund Your Business4

Bootstrapping

Bootstrapping is a way of self financing your business venture using the revenues from yourbusiness. Bootstrapped startups do not have a lot of spare cash, this forces them to findways to save money. Bootstrappers find bargains, utilise free and freemium services,crowdsource operations, use open source software and basically do whatever it takes tomake their business work within the budget.

Bootstrapping isn't all about saving money. You can help elevate your business buy findingresources or premises that can provide your business with added prestige and help buildyour reputation.

Two traditional ways of bootstrapping are:

Invoice FinanceInvoice finance is a great way of funding your business through your sales. Invoice financeallows you to receive 80%-90% of your sales within a couple of days instead of 30 or moredays.

LeasingLeasing (renting) instead of buying assets and equipment relieves pressure on yourbusiness's cash flow.

`© Copyright 2013 | arinobe.com

             How To Fund Your Business5

Business Angels

Business angels are usually wealthy individuals who invest in small fast-growing companiesfor their own profit but also for enjoyment. They are usually established entrepreneurs thatenjoy the thrill of working with a start up. Business Angels want to be actively involved inthe company but do not want to get involved with the day to day running.

Business Angels tend to invest from £10,000 to £750,000 in exchange for up to 50% of thebusiness. The average investment by a UK Angel is around £40k.

Currently angel investment has been focussed on businesses that have been trading for atleast two years, are showing signs of high growth and they can see an exit strategy.

Angels also tend to invest in companies in industries that are familiar with and have mademoney in that industry.

There are many business angel networks you can join and submit your business plan, ifthere is interest, it is likely you will have to pitch your business to a potential investor.

The main advantage of angel investment is the advice, support and business connectionsthat an experienced angel can provide. This can be even more valuable the equityinvestment they provide. The only drawback of angel investment is that you may have togive away more of your business than you had originally planned to.

`© Copyright 2013 | arinobe.com

             How To Fund Your Business6

CrowdFunding

Crowdfunding is a new way of obtaining finance where large groups of people can investsmall amounts of money in your business.

Crowdfunding is growing fast and is becoming a viable option for all businesses. There aremany crowdfunding option available to entrepreneurs, these are:

RewardThis is where people fund your business in exchange for rewards. Possibly the mostwell-known site to offer this form of funding is Kickstarter.

EquityThis is where the crowd invests in your business in exchange for equity.

LoanThis is where you raise a loan and repay with interest. In raising funds from the crowd, notonly do you secure the capital you need but you also attract attention and an audience ofpotential customers.

Crowdfunding is highly accessible, entrepreneurs can still get their businesses funded whenthey have refused by business angels and banks.

The downside of crowdsourcing is that you will not get the type of support you might getfrom a business angel and access to their business connections.

`© Copyright 2013 | arinobe.com

             How To Fund Your Business7

Banks

Going to the bank is the traditional way to obtain finance for your business, and if you are anestablished business and prepared to offer some security against your loan it is still a viableoption. If you are a seed or start up without a long trading history obtaining finance from abank is unlikely.

Banks do provide small businesses with credit cards and overdrafts that can be very helpfulin difficult times, however they should only be used as emergency funding.

Banks are looking for security and assurance that they will recover the money that arelending to you. If you can offer personal guarantees this will strengthen your position.

When analysing your business banks will want to see that you have positive cash flow andare profitable. Do not approach a bank for a new loan if you are looking to cover losses.Banks occasionally do lend to cover losses, but this facility is usually only open for existingcustomers.

Banks will inspect your forecasts and start up costs to ensure your projections are robust.Banks are more likely to look through the details of your business plan. Understand yourbreak even point and how much sales you need to turn a profit.

Banks assess new loans using the CAMPARI method, the acronym stands for:

CharacterThey will want to know if you are honest and reliable. A strong business or employmenthistory will help. Its also easier to get a loan from the bank that you currently for businessor personal finances.

AbilityYou will need to prove to the bank you and your team have the business acumen to manage asuccessful business. Use your previous trading or business plan to back this up.

Margin or MeansThe bank will want to know if your business has significant net assets – how does thiscommitment compare to the amount requested from the bank? Are profits retained in thebusiness?

PurposeWhy do you need the money? Is is to buy equipment, overseas expansion? You need to havea plan for the money, banks will not cover contingencies or losses. If this is the purpose ofyour loan you should be seeking equity investment.

`© Copyright 2013 | arinobe.com

             How To Fund Your Business8

AmountYou need to understand your requirements and be able to back this us in your financialprojections.

RepaymentThis is probably the most important factor, your previous trading history and/or yourbusiness plan should demonstrate that you can repay the loan.

InsuranceCan you offer the back a guarantee they will recover the money loaned if you default?Banks will want security against your loan, whether it is through your business or a personalguarantee.

Banks will expect you to have prepared a full business plan or funding document to supportyour application. Unlike investors banks usually read your full business plan. Make sure it iscompelling and succinct especially the financial projections as they will be intenselyscrutinized.

`© Copyright 2013 | arinobe.com

             How To Fund Your Business9

Seed Funding & Support

For seeds and start ups business incubators and accelerators are a great way of gainingfunding, knowledge and support as they provide them with a base with other similar-sizedcompanies.

If you are starting up a technology company or social enterprise, there are many greatoptions available. Many universities run incubators for recent graduates and will providethem access to research facilities and will provide them with funding for 1-2 years.

Government grants and loans

The government has made £117.5m open for Start Up Loans up to 2015. This is one of manystartup loans available and literally thousands of grants that are available forentrepreneurs.

The application process for government loans and grants can be very long and complicated.They also require match funding from the business owner.

Before applying for government-backed loan or grant seek professional advice as there areliterally thousands of grants available to small businesses, and you need to choose the rightone for your situation.

Below is an overview of the products that are currently available.

Direct GrantA cash award for activities such as training, employment, export, capital investmentprojects usually required to put up around 50% of cost

Repayable GrantFunding offered with intention that monies are paid out of future revenues. If the projectfails, the grant is written off

Soft LoanThe T&C’s are more generous than normally, for example the interest rates are lower.

Equity FinanceProvider of funds gets equity share When value of the firm increases stake returnedRequirements usually less demanding

`© Copyright 2013 | arinobe.com

             How To Fund Your Business10

Venture Capital

Venture capital is financial capital provided to early stage, high-growth startup companies,usually in the technology and scientific industries. Venture capitalists are investment firmswho have large sums of money to invest in the right type of business. Do not approach aVenture Capitalist if you are looking for investment in your business of less than £1.5m.

Venture Capital is out of the reach of most businesses, it limited to exceptionallyhigh-growth companies. If you do get funding from a venture capitalist, you should beprepared to lose majority of your business.

Stages in Startup Funding

Funding your startup should be viewed as a journey. If you want your business to growcontinually it may not be enough to get just a startup grant or bank loan.  You may requireseveral funding rounds, from initial the startup grant and ending up with venture capitalfunding

Generally there are five stages of startup funding, however not all businesses go throughevery stage.  The phases are:

Idea PhaseThe original entrepreneur thinks of the business idea and immediately starts investing timeand money into developing the business idea.

Development Phase

This phases commences when the original entrepreneur has worked on the idea and provedthe concept to themselves and close friends and family. They realise they do not have all ofthe skills required to run the business and start looking for help.  Without any revenues to payanyone they eventually seek a co founder.

Seed Phase

This is probably the most familiar stage of for most entrepreneurs.  The idea has nowreached a level of maturity that now needs to be fully tested in the market place.  The

`© Copyright 2013 | arinobe.com

             How To Fund Your Business11

founders believe is now ready to launch. They write a business plan and ask for investmentfrom their family, friends and start seeking other investment options.

They do not realise the business is not mature enough to approach banks and businessangels, however this is a perfect time to seek seed funding, startup loan or grant.

This is a good time to start expanding your network by seeking a help of an advisor that canassist with the development of the business.

Angel Phase

If the business is growing rapidly and there is a commitment within the team to expand thebusiness you should seek angel or crowdfunding investment.

Venture Capital Phase

If the business continues to grow rapidly and you are showing signs of becoming a marketleader your business will attract attention from venture capital firms.

`© Copyright 2013 | arinobe.com