What type of investment do I need?

Looking for investment, but unsure of your options? SINC have written this brilliant guide to walk you through the funding routes available. 

The jargon-based world of finance and investment can be baffling at times. With so many options, and so much to choose from, navigating the tricky waters to find the finance option that is right for you and your business can be hard.

The type of funding that you need depends on your business and the nature of your needs. Listed below are some of the most common sources of finance and funding that are available to you as a start-up. Use this simplified guide to help you pick the type of finance that is right for you and your business to help get you up and running on the road to success.

 Lower Tier Funding – 0-25k

1.Personal Investment

Self-funding through personal investment is a great source of funding if you are just starting out. Also known as bootstrapping, personal investments are an effective form of funding for first-time entrepreneurs. When you use your own money, you are tied to your business and this is seen as an advantage by investors who may want to invest further down the line.  

Personal investment is a great investment choice if you only have a small initial requirement. With your own money being on the line, this extra pressure to succeed may lead you to take more care with the investment decisions you make. This risk of losing your own money may ground you in your decision making and you are likely to work harder to reduce the risk of losing everything you have put in as a result. Alongside this, the lack of outside investors having a say in your operations means you have full control over the business and are free to grow organically as a result.

A brilliant example of an entirely self-funded company is PlentyofFish. Founder Markus Frind founded PlentyofFish in his apartment and it has grown to become one of the largest dating sites in the world with over 38 million users and over 6 billion monthly page views.

However, like all start-ups, there is a risk that your business will fail and in the case of personal investment, this means losing all the savings you have put in.  Along with placing high financial risk on you as an investor, personal investment may not provide enough capital for you to become successful. Alongside this, the lack of external investors means you may miss out on guidance and help that comes with investors and mentors and this extra support can be invaluable in getting your business up off the ground and on its way to success.

The small business heroes have a brilliant guide to personal investment to help you get up and running. You can find it here

2.Friends and Family

Another common source of funding is requesting financial support from family and friends. This source of funding is best for start-ups that need a larger investment than their personal funds can provide. The aim is to use this type of funding to kickstart your business, so you can grow to the point you can get other forms of funding. 

The uniqueness of securing funds and investment from friends and family makes it an attractive form of investment. One of the main advantages of this method is the personal relationship often means that repayment methods and time frames are often far more flexible than they would be with other forms of investment. Alongside this, the personal relationship you have with your investor may put you at greater ease when presenting ideas and this may relieve some of the pressure that comes with starting a business. Alongside this, you have the added bonus of increasing your family’s wealth should the business ever profit.

While receiving investment from family and friends is advantageous, there are also risks. You are not just putting your own money on the line but also the money of people you care about. As a result, there is the chance of the line between your personal life and your business life becoming blurred. The added risk could cause investors to overstep their boundaries and try to oversee business operations and this may be a strain on personal relationships. This guide on asking friends and family for financing will help you preserve your relationships while also securing the funding you need.

Lower-Mid Tier Funding – 25-100K

3.Crowdfunding

We have all heard the stories about all those businesses that managed to raise millions through crowdfunding, but with tens of thousands of crowdfunding requests out there, the actual return is considerably lower.

Crowdfunding involves taking small to medium amounts of funding from a large number of people and usually takes place via the internet. To be successful, crowdfunding takes a lot of time and effort to get your message out there and ensure people are interested in your idea and what to invest as a result.

If you use crowdfunding to source investment, it is common practice to offer your investors something in return. This is known as a pledge and can be anything from a simple thank you, to an early release of a product, to equity in the business. For example, Craved are currently running a campaign on crowdcube to raise equity. Click here to see what to expect.

There is more to funding your business than just money, and if used correctly, crowdfunding can be invaluable in increasing awareness of your business and promote your product or service to a wider market. An initial way to get the ball rolling, crowdfunding provides you with a sustainable and often ongoing source of income to fund your operations with.

However, as with other indirect forms of investment, crowdfunding is another source of funding that comes with no support. The nature of crowdfunding means you may miss out on guidance and help that comes with investors and mentors and this support can be far more valuable in the long run than large numbers of capital. Alongside this, there is heavy competition when it comes to crowdfunding platforms and there is a high chance your business idea may be overlooked or rejected.

There are lots of crowdfunding sites available and it can be hard to know which is best for you. This beginners guide to crowdfunding will help you make the most of the platforms available.

4.Bank Loans

Banks are another brilliant place to go if you are thinking about the funding options available to you. Like other professional lenders, banks want to know what your plan is for your business, the challenges that could arise, the problem-solving techniques you have in place, and what your exit strategies are.

If you qualify, banks are a great option when looking for larger amounts of funding and may loan you as much as 85-90% of the outstanding invoices which you can then pay back over a series of payments with interest. Loans available and the interest rates that come with each loan vary from bank to bank so it’s important to do your research to make sure you pick the one that is right for you.

You can find out more about the type of business loans available to you as a start-up business here.

One of the main issues with bank loans is, depending on the bank, they often want to see some sign of success before they lend you money to make sure that they are going to get some sort of return on their investment. This can make it hard for smaller start-ups who have yet to see a return on their investments to secure bigger or further funding. This is paired with the fact that the money you borrow must be repaid regardless of success, leading to potentially huge losses as a result.

However, bank loans are a quick form of funding once you have qualified and are often very flexible. Most banks offer various funding options depending on your needs and this allows you to access the amount of funding that is most beneficial to you and your business with ease. Alongside this, you are unlikely to have to relinquish any control over your business allowing you to get that financial support you need while also being able to grow organically.

Higher-Mid Tier Funding - 100-500K

5.EIS

EIS stands for Enterprise Investment Scheme. The EIS is a UK government tax relief scheme designed to encourage greater and more frequent investment into small, high-risk, early stage companies that qualify for the scheme. The scheme helps higher risk companies raise finance by offering tax relief on new shares in companies that qualify for the scheme. The scheme encourages investment into start-ups and unlisted companies providing a series of benefits to both the start-up and the individuals that invest in it.

This scheme offers a tax relief of up to 30% for investors for investments up to £1,000,000 in each tax year and this makes it a lucrative option for investors and benefits the start-up as a result.

For example: If the investor invests £10,000, they will receive a tax relief of £3000. This means that the investment has only cost the investor £7,000 while you have received £10,000.

However, one of the main disadvantages of this scheme is that qualifying for tax relief not only depends on the individual circumstances of each investor, but also of the business receiving the investments and the uncertainty of the future availability of this option could make it a risky option if you are looking for longer term investment.

This ingenious guide to EIS breaks it down so you know exactly what to expect.

6.SEIS

SEIS stands for Seed Enterprise Investment Scheme. Like the EIS, the SEIS is a government tax relief scheme. It provides tax relief to investors who are making investments into companies that qualify for the scheme and was designed to help small, early-stage companies raise funds through individual investors. This scheme is incredibly generous providing huge tax relief for investors making it an incredibly lucrative option for investors, benefiting start-ups as a result.   

When investing via this scheme, investors receive a tax relief of a staggering 50% on investments of up to £100,000 each tax year making it a fantastic scheme for both start-ups and investors.

For example: If the investor invests £10,000, they will receive a tax relief of £5000. This means that the investment has only cost the investor £5,000 while you have received £10,000.

However, like with the EIS, one of the main disadvantages of this scheme is that a tax relief not only depends on the individual circumstances of each investor but also of the business receiving the investments and the uncertainty of the future availability of this option could make it a risky option if you are looking for longer term investment.

This helpful guide to SEIS summarises the key features so you can be confident in whether or not you’re making the right choice for you.

Higher Tier Funding – 500K +

7.Angel Investors

Angel investors are normally wealthy individuals who have an interest in investing their personal funds in start-ups which makes them a popular choice for entrepreneurs. The role of an Angel investor, however, can vary considerably. For example, some Angel Investors will ask for a percentage of the business that could be as high as 40% in return for the investment, whereas others will be happy with just a percentage of the returns.   

The nature of Angel Investors normally makes them a great option of finance for start-ups, especially for those that are struggling to find investment. This is due to Angel Investors tendency to make decisions based on instinct rather than facts and figures. They also bring valuable ideas and advice to the start-ups they invest in. Angel Investors are keen to see huge returns, and as a result, they can act as mentors providing guidance and support about a variety of issues whenever needed as part of their investment.

While they tend to take greater risks when investing in the hopes of getting higher returns, Angel Investors tend to invest lower amounts then Venture Capitalists (point 8) and this could be an issue depending on the amount of funding you are looking for.

Searching for Angel Investors can be tricky. Even when the initial conversations go well, the minor details can deter investors from investing. It’s not an easy process so check out this guide to find out about what you can do to increase your chances of success.

8.Venture Capitalists

If you are looking for a considerable amount of funding, venture capitalists might be the way to go. As professionally managed funds, they tend to invest in companies that have a huge amount of potential for returns and success. Venture Capitalists invest in return for equity in the business and are usually uninterested in the early stages of a business as the amount they tend to invest means they often want to see returns before they get involved and are unlikely to go for high risk investments as a result.

Alongside their tendency to invest large amounts of capital in a business, venture capitalists may also provide advice and guidance as part of their investment which can be invaluable in moving growth forward. This means you may have to give up some control in your business and be more flexible so if you are not interested in the investors potentially being heavily involved then this may not be the best type of funding to choose from.

However, venture capitalists tend to look towards companies that are more stable, and this can make them a hard source of finance to access. With a tendency to go for investments that will recover their investment in the shortest time frame possible, venture capitalists are not always the best option for smaller businesses that are still finding their feet.  

Venture capital funding comes with a huge amount of credibility and if you can get venture capitalists to invest, then other types of funding are likely to follow. This can open many doors for your business and give you access to a wider network of important individuals who can provide advice and membership, partner up with, mentor and support you and your business.

This type of funding is not easy to obtain. Forbes guide to Venture Capitalists breaks it down to better prepare you on what to expect and increase your chances of success. 

What’s next?

The vast number of finance options available make it easier than ever to get started. Before you choose your finance option you should ask yourself two questions. One; how much funding do you need and two; do you need short term or long-term funding.  This will make it easier for you to choose the option that’s right for you and allow you to take advantage of every opportunity that comes your way.

With an entire world out there bursting with opportunities waiting for you, it’s time to get started. For support and help with everything from grants, to co-working spaces, to events, we’ve got all you need to help kickstart your business. To find out more, please get in contact with us here.

Thanks to Ellen at SINC for writing this blog  

If you want to contribute to the Chamber blog, contact us on hannah@brightonchamber.co.uk