By: Simon B
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Financing a Business
If you are starting a business or looking to make a significant expansion, you may need to secure external finance. There are a number of different methods of securing finance for your business – each has its own advantages and drawbacks.
Investment finance is a common way of getting funding for a business. The investor puts money into the business, in exchange for shares in the business. This means that you will have to give up a share of the business’s profits, but you will also give up a share of the risk.
Investment finance can bring advantages beyond the funding it provides for your business. By getting involved with your business, investors can use their knowledge, experience and contacts to help grow the business, which can be invaluable, particularly if they are experienced in business and you are just getting started.
However, having other investors with a stake in the business also means that they will have a say in any major decisions regarding the company. You should only bring an investor on board if you are prepared to share control of the company.
Convincing someone to invest in your company can be difficult – they need to be confident that the business idea can succeed, and that you are capable enough and willing to make it succeed. Putting together a good business plan and business pitch is essential for this.
Getting a loan
A common way of getting funds to finance your business is through a loan, usually from a bank.
A business loan will work similarly to a personal loan – when applying, you will need to convince the lender that you will be able to pay back the amount of the loan, with interest.
The amount of the interest due will depend on a number of factors, including how much you borrow and how long you will take to pay it back. Some loans have a variable rate of interest, meaning that the amount of interest could change as you are paying it back.
If you own your own home, you also have the option of taking a “secured” loan – this means you use your property as equity, which can increase the amount you can borrow or lower the amount of interest you will have to pay. However, this does mean that you could lose your home if you fail to make the repayments.
Having to make repayments over the life of the loan can make a loan a less attractive financing option, due to the lack of flexibility compared to other options. Your lender may be flexible to a point, allowing you to take payment holidays if necessary, but you will generally be expected to keep up repayments as agreed.
However, taking out a loan does mean that you will only have to pay back the loan and its interest – unlike other forms of funding, you won’t give up a share of the company or of future profits in return for funds.
Unlike the other methods detailed here, the more notable and successful crowdfunding efforts have been to fund a particular product or service, rather than a business itself.
However, there are alternative methods for businesses, such as CrowdCube, which allows businesses to crowdsource investment in return for small shares, similar to a more traditional investment model.
Crowdfunding usually works by securing funding from would-be consumers of your products. They pay for you to make the product, often receiving some sort of benefit in return (a copy of the product when it is completed, for example).
This method of funding is useful if you have an innovative product that you are convinced people would be interested in, but potential investors are unwilling to take a risk on.
However, asking your customers to put faith in you in this way can backfire if you are unable to deliver on a product that they have already paid for. Letting down investors is never good, but it could be catastrophic if doing so alienates your entire customer base.
This also requires you to have a product which captures peoples’ imagination – this is easier if you are producing an innovative piece of technology or piece of art. If you are attempting to fund a useful but more mundane product, it may be more difficult.