Thinking of starting a business, but not sure what you need to know? Begin your journey here with my basic guide to business start-ups. In my role as Editor for The Business Show and Business Startup, I have talked with literally thousands of business owners and entrepreneurs about what they really need to know, not what a business guru thinks they need to know. This series is the result. Today’s blog looks at how the different kinds of investment work.

How To Attract Investment

Whether your business needs funding to get off the ground, or grow to the next level, the options are basically the same. Here, we’ll look at how each of the main routes to funding works, as well as the benefits of each.

Investment finance

This is only open to limited companies, not sole traders. Sell part of your business (shares) to an investor, who will take a share of any profits or losses. Investors can bring new skills, will share the risks with you and you won’t need to pay any interest or repay a loan. Having an investor can be demanding, expensive and time-consuming, and you could own a smaller part of a larger concern, while you may have to consult your investors before making management decisions. But they do bring the benefit of all their experience to you business, as they are literally invested in your success.

Loans

With any loan, you will need to repay the original loan amount, plus interest. They can be secured on property, with fixed or variable interest rates. Loans could be used for assets such as a vehicle or equipment, or for start-up capital and they’re available from banks or the government.

Grants

You can get a grant from the government, the European Union, local councils and charities. There’s no need to repay anything, but there’s a lot of competition and they’re usually awarded for a specific purpose or project. Charitable projects, or those of benefit to the community, are most successful.

Overdrafts

They may be useful in a pinch, but overdrafts should only ever be for the short term. You will be charged interest and you may be charged fees. Other options are usually more favourable.

Invoice financing

This method can be useful for trading companies with outstanding invoices who need to access the cash they represent. A third party buys your unpaid invoices. Factoring usually involves an invoice financier managing your sales ledger and collecting money owed by your customers. The invoice financier will buy the debt owed to you by your customer and give you a percentage – usually around 85%. They collect the full amount from your customer and pay the remaining balance to you. You then pay the financier’s interest and fees. Invoice discounting means that you continue to chase the client for payment. Both options are usually only available on commercial invoices and don’t apply if you sell direct to the public.

Leasing and asset finance

Leasing or renting assets, such as machinery or office equipment, saves the initial costs of buying them outright. Interest rates are usually fixed, but prices can be higher than buying outright. Less risk than a bank loan, because if you can’t make payments you’ll lose the asset, but not your home. You can’t claim capital allowances on a leased asset if the lease period is less than five years (or seven years in some cases).

Crowdfunding

A relatively new phenomenon, crowdfunding can be a great way for unusual projects to get funding. The premise is that you appeal to the public to fund your business, usually through a website. Of course, you need to offer the individuals something in return, whether that’s financial profit, or a discounted price on a finished product. Crowdfunding has been used to fund everything from music albums and videogames to new technology. This sector is currently not regulated.

Useful Links:

Funding Circle

Crowd Cube

UK Business Angels Association

Office For National Statistics

 

NEXT: How business tax works

 

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