Steps Five to Starting in a Business
How to raise finance for your business
What are potential investors
looking for in a company?
They want to see research
and establish the potential
risks and returns involved in
investing. Do you know who
to approach for finance, and
how? What do they expect from you, what are the legal
issues, what documentation will you be expected to
sign? Should you offer personal guarantees or other
security?
Nearly every business being launched will require some
investment capital. If you can rely on savings or family
and friends for seed financing that is a great start.
Many banks and investors will expect to see that you
and your family have invested in the venture.
But, most entrepreneurs will need additional financing
to get a business started.
Check if there are any starts up or support grants in
your area.
If you have a business idea that could benefit from an
injection of capital, the most usual financing route is
Banks or venture capitalists. Angel investors are
becoming more common, and crowd funding is a
growing source of investment.
In these days of austerity, raising finance is more
difficult and expensive than ever. You should have a
business plan in place that will enable potential
investors to see you have a realistic grasp of the costs
of the business and a commercial plan in place to offer
them a return on their investment.
Ideally, Investors will want to support firms with good
cash flow management, a strong balance sheet, a sound
business plan, a well-balanced management team, a
good business record, and who are looking to develop
and grow.
If you are a start-up, there are limits to which of these
boxes you can tick, but at least put yourself in the best
light by having the others ticked!!
You need to put some real effort into preparing a
business plan. Don’t just mindlessly fill in a template.
This needs to be a well thought out document, with
particular emphasis on how you are going to achieve
projected sales.
Venture capitalists and financial institutions need to
ensure that their money will be well invested. They will
expect you to “pitch” your product or service to them.
They will want to establish the potential risks and
returns involved in doing business with you.
Having your market research and business plan well
prepared demonstrates to potential lenders that you are
serious, have thoroughly studied your market sector,
your potential customer-base, and your competitors.
And that you are prepared for the possible financial
hurdles ahead.
When it comes to raising debt or equity finance there
are a number of legal issues to consider carefully .You
will be asked to sign standard documents, the small
print must be read and understood before you sign
them. Be aware of the fees you are accepting.
Investors will expect you to check carefully what you
are committing yourself to. So if you are not clear what
something means, ask for clarification. Be clear at the
outset about any strings attached to the finance that
are mentioned in the documentation. Ask for a detailed
term sheet early on in the process.
They may ask for personal guarantees or other security,
and may set financial covenants. You should be wary
of using your home as security, and be sure covenants
are achievable and clearly understood.
Crowd funding is the current alternative trend in raising
finance. While banks are still reluctant to offer
competitive finance, small businesses are searching for
alternative sources of investment.
Similar to Angel Investment, Crowd Funding is a way of
raising finances by selling part of your equity. The
main difference is that instead of there being just one
investor, you sell your investment idea to a crowd.
The success of Crowd Funding has disrupted the
investment business, giving entrepreneurs the
opportunity to access funding from the masses, without
the usual upfront fees. The winners seem to be those
with the highest social capital or largest database. It
demonstrates the value of trusted relationships and an
engaged network.
Business investors want to put their capital behind
exciting new projects. Many are finding that more
traditional forms of investment are showing very poor
returns. They appreciate that with new businesses
sometimes an exceptional Return on Investment (ROI)
is achievable. Some enjoy the spirit of adventure.
All of them will be successful business people in their
own right, they are often strong-willed, determined,
dedicated and hard-nosed. These days it is as much
about the entrepreneur choosing their investor as the
other way around.
Currently in the UK the Financial Services Authority
(FSA) views Crowd Funding as a raising money for
funding from the public, which is currently illegal
unless approved by the FSA.
So check that your chosen Crowd Funding platform
complies with the relevant authorities, or you could put
your business and yourself outside the law.
Be aware that investors will want to see some detail of
your business before investing. This could leave your
idea vulnerable to “copying”, so when you are drafting
your business pitch for potential investors, provide
enough information to attract attention and interest,
without giving any vital information away. Then, when
potential investors come forward, ask them to sign a
NDA (non-disclosure agreement) before you provide
further information.
A common error Entrepreneurs seeking additional
investment often make is underestimating their funding
requirement. Then when the finance is agreed and
provided, they may find that they need more capital.
This can be very damaging to the relationship with the
investor and will leave you short of funds to complete
your plans. So ask for a little more than you think you
actually need so that you have a reserve or contingency
fund.
If used properly, Crowd Funding can be more successful
than sourcing the full investment required from a single
individual or organization. But make sure you have
done your research and taken precautions to protect
your business and yourself.
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