When the banks fail you – or simply aren’t an option – where do you turn to for funding? Stephen Attree, managing director of MLP Law, explains.
If you’re running a successful small business, at some point you’ll invariably find that securing funding becomes the key to unlocking further growth.
Whether you want to expand your office, hire more staff, increase production or pursue new business opportunities, ultimately it all comes down to money. The temptation is to seek funding from whoever has supported your business up to this point – such as a bank or a private investor. But is this really the best option? And what if your usual backer is unable to oblige or makes more onerous demands than you feel comfortable with?
These days, there are a range of options open to small businesses. You might want to pursue traditional funding routes such as bank lending or venture capital/private equity. Or you might be better off going with non-traditional funding routes such as crowdfunding or peer-to-peer lending.
Let’s look at each of these in more detail.
Bank lending is a relatively low-risk and low-cost option in that your provider will typically have a proven track record of supporting small businesses and won’t expect exorbitant returns on their investment. However, banks tend to use fairly conservative criteria to determine risk and even those that pass generally have to provide security such as property, stock or machinery, which may be forfeited if the loan isn’t repaid. From a legal perspective, this means a business that fails to make its repayments could see its assets repossessed.
At MLP Law, we’ve recently gone down the bank lending route ourselves. We decided that we wanted to develop our business services division, recruit additional staff and grow turnover by at least 15% in the next 12 months, so we arranged a £640,000 financial package from Yorkshire Bank’s Business and Private Banking Centre in Manchester.
Venture capitalists/private equity
Bringing in external investors is also worth considering.
Venture capitalists and private equity backers will generally be able to provide money quickly, while also offering their knowledge and connections to help your company grow. However, they’re generally focused more on big-ticket investments of £1m and upwards, they are often expensive, and they can impose strict conditions such as demanding a substantial stake in the business. There is also the potential for legal problems if the company’s founders and its new investors differ on how to take the business forward.
The TV show Dragon’s Den is full of entrepreneurs who gave up far more equity than they originally planned simply to attract investment. For example, Levi Roots asked for £50,000 for a 20% stake in his Reggae Reggae Sauce business but ended up giving away 40% – although his career has certainly taken off since then.
So what about non-traditional routes such as crowdfunding?
An increasing number of businesses are turning towards platforms such as Crowdcube and Kickstarter to get funding because the process is so quick – and it can act as free advertising by raising awareness of your business. But crowdfunding is not without its risks since publishing your business plan online will allow competitors to learn about your strategy, and there is always the fear that everyone will know if your pitch flops.
Having said that, companies from sectors as diverse as technology (Pebble), film (Veronica Mars), food (River Cottage) and drink (Brewdog) have all successfully financed projects through crowdfunding.
Another non-traditional funding option is peer-to-peer lending in which entrepreneurs seek financial backing for their businesses from unrelated individuals on sites such as Zopa or Funding Circle.
One advantage of this is that lenders will have chosen to support your business so they are more likely to act as brand advocates for you, while another is that entrepreneurs may be able to tap into funding through this anti-bureaucratic approach that they simply couldn’t secure elsewhere. But it can be difficult to know where you stand with non-traditional investors and, while it is great for small one-off cash injections, it may not work so well if there is a continuing need for new capital in the business.
Examples of companies that have used peer-to-peer lending to good effect are powerboat company Saber Powersports and chocolate maker Moo Free Chocolates.
Every business is different
As you can see, there are a lot of issues to consider when weighing up various funding options.
The key is to speak to as many stakeholders as possible. Talk to the company’s senior management team and ask current investors how they would feel about you bringing in fresh investment from new sources.
You should also speak to the business advisors that you trust the most, whether they be lawyers, accountants, dealmakers or consultants. At MLP Law, for example, our clients regularly come to us to find out about the legal implications of securing funding from new sources.
Every business is different though and there is no one solution that fits everybody. The key is to find the funding option that is right for you.