When it comes to business funding, there are many options available. Although the type of business that you have, along with the level of funding that you require will determine what financing option you explore.
Angel Investor
Angel investors are individuals with a high net worth that look to back businesses in return for an equity stake. This type of funding is usually favourable by start-ups and early-stage businesses. Not only does an angel investor provide capital to the business, but they also provide expertise and their knowledge of business. Angels typically have insight into the niche in which they invest in. For start-ups, angels can be incredibly helpful as they tend to have connections in the sector which they embark on. Angels can invest anywhere from £10,000 upwards, although most have an upper limit of around £500,000.
Venture Capital
This type of funding is normally for businesses that are in their start-up stage. Venture capitalists typically work with businesses that are high risk, but have the potential for exponential growth. Venture capital firms work with early-stage companies in order to scale their operations. The way VC’s work is by investing in a company and in hopes that the company will one day have an IPO or be sold for a large sum of money.
Working with a VC is not always an option for all businesses, as these firms tend to work mainly with start-ups and not companies that are already established or operate on a local scale. There must be room for the business to grow and the option for scalability. For small businesses, this is not always an option. In which case, business loans from banks may be the best route.
Merchant Cash Advice
This is a type of unsecured, short term business financing method that works similarly to a standard business loan. Repayments are made from part of your future sales. The repayments that are made to the creditor are automatic and daily, so the repayments are never done manually.
You first agree to a set amount being taken from each card payment. This means that your creditor will receive repayment based on the transaction amount that your customers are fulfilling. The more you pay back (the more transactions are made to you), the faster that your loan will be cleared. The repayment term is not set and is completed once the loaned amount is returned with interest. Repayments are reduced when sales periods are slow. This form of financing comes at a cost, this is the ‘factor rate’. Normally somewhere between 1.1 and 1.5. This means that if you borrow £10,000, then you will need to pay back £11,500. Merchant cash advance companies UK will be able to explain this form of funding in greater depth.
Crowdfunding
This is when businesses secure capital from various avenues such as family, friends and even members of the public that are interested in seeing a business succeed. Sites like Kickstarter allow businesses to secure capital and do not have to sacrifice their equity. In return for capital, backers can expect items in return, these can range from anything from t-shirts to membership cards. Each backer will pledge a small amount, but with a pool of thousands of backers, this can result in large sums of capital. Crowdfunding platforms allow business owners and project creators the tools required in order to showcase and pitch their project to backers. Pebble Time, the most successful Kickstarter campaign of all time managed to raise over $20 million and was acquired by Fitbit in 2016. If this capital was raised angel investor, the potential equity stake that an angel would require could be significant. Bank’s tend not to loan $20,000,000 to start-up companies and venture capitalists would also be unlikely to invest this much.
