The 6 vital methods you should be using to raise the funds you need to increase your profits.
Author David Hargreaves, The Chief Guru at The Growth Gurus.
Your business will require an increased amount of working capital in order to fund your growth and boost your profits.
Having insufficient working capital in your business is likely to dramatically reduce your profits, increase your risk of failure and create unnecessary levels of stress.
Top Tip Funding is not a luxury; it is absolutely critical to creating high levels of sustainable growth.
This document explains your funding options in detail.
The six main methods of increasing your working capital.
1. Your own money.
2. Your own profits.
3. Your Friends and family’s money.
4. Other People’s Money (OPM)
5. Selling your shares.
6. Free money.
Your Own Money
Your Savings
During the start-up phase, we believe that you should use your own money to part fund your growing business. You should also sell assets that you don’t really need, to fund your business.
We also believe that for the first few months you must personally feel the pain of spending your own money.
Secondly, you should not ask others to invest or lend their money to your business without first investing your own money.
Top Tip You should only use a modest proportion of your own funds to finance your business.
We believe that you should retain a safety net of savings, just in case things don’t go to plan.
Having cash set aside should also ensure that you make sounder business decisions. This is because you are likely to be more relaxed and less emotional when you need to make important decisions.
Your Business Profits
Using your profits exclusively to fund your business is often referred to as ‘Bootstrapping’ or ‘growing organically’.
We applaud Bootstrapping for the first 6 months or so. Frankly if you can’t make your business work using your own funds, you are unlikely to be successful using other people’s money.
After 6 to 12 months, exclusively Boostrapping your business is likely to bring your growth to a halt. Before this point, raising funds via other people to fuel your growth is critical.
Top Tip A successful entrepreneur would never advise you to Bootstrap.
Top Tip 2. Successful entrepreneurs will also tell you that your profits should be used to increase your personal wealth rather than to fund your business. That’s why they are rich and you are not (yet).
Your Friends and Families Money
If you have a truly great idea and you have proven your model, then we encourage you to look to your friends and family to raise a proportion of the funds your business needs.
If you later wish to raise funds from a business angel, they are likely to expect that you initially raised money from your friends and family. Why should they invest in you if you have not invested yourself?
Raising funds from your family is also likely to keep you even more motivated and focused on succeeding. After all, you don’t want to let your family down do you?
It may help to create a formal agreement with your family for any loans or investments. We can help you with this.
Top Tip Please don’t ask for more money than you know your relatives can afford to lose!
Top Tip 2 Nor should you ask for money from friends and family until you have utilised your own savings.
Pension Backed Funding
Pension Backed Funding (PBF) is proving increasingly popular.
PBF entails setting up a SSAS company pension scheme, where the founders are the only members. With our help you then transfer some or all of your old pension schemes into it.
The SSAS may then lend up to 50% of the value of the fund to your own business. Rates are typically around 1.5%-2% pa over 5 years. As the Trustee, you make this decision.
EG If you transfer £200,000 from your old pensions into the SSAS you can then invest up to £100,000 into your own business. This is your call.
Top Tip Many suggest that this form of funding should only be used in conjunction with funding from elsewhere.
Top Tip 2 It is often advised that PBF should only ever used by companies with a strong management team and support.
If you wish to set up a SSAS loan, The Growth Gurus have almost a decade of experience.
Other People’s Money (OPM)
The Start Up Load Company (SUL)
If you have been trading for less than two years, you could access up to £25k per director from the Start Up Loan Company.
Even if you have a mature business, you may be able to access these funds.
The Start Up Loan Company is a Government backed body set up to help Start Ups. A Start Up loan is a personal loan with rates of less than 6.2% and payable over 5 years.
We can support you with the process including helping with your Business plan.
Top Tip. Please don’t over estimate your potential sales and underestimate your potential costs. You may benefit from taking some advice on your financial projections, something we can also help with.
Business Loans
A business loan, as the name implies, gives you the funds you need, and you pay these back with interest.
Each funder has their own criteria, and these vary considerably. This makes sourcing the ideal provider almost impossible for any business owner without support from a finance expert.
A number of funders require your business to be profitable, yet with others, your turnover is more important.
Rates vary from 5% pa and loan periods can vary as well from a few months to five years.
The great news is that some loans can be processed in less than 48 hours.
Top Tip. It is vital that you carefully choose 4 or 5 of our 200 lenders and focus on them. The rest are likely to either be (a) inappropriate for your business and (b) likely to turn you down.
Top Tip 2 Just because a funder is willing to back you does not mean that you should simply agree.
The Growth Gurus have access to all 200 business loan providers, we will understand which funders are suitable for you and we can help increase the chance of receiving the ‘yes’
Regional Growth Funds
Most regions in the UK have Regional Growth Funds and you should be able to access these funds if your business resides in these areas.
The interest rates are typically much lower than commercial funders and as a result we believe that Regional Growth Funds should be one of your first options.
The Growth Gurus have access to all the Regional Growth Funds.
Invoice Discounting
Invoice discounting enables you to be paid from your invoice, before the invoices are due to be paid.
You should be able to select which invoices you need financed to give you part of the working capital you require.
Top Tip. Most financial experts suggest that this form of funding is used (a) selectively and (b) only when you are growing your sales quickly and © should only form a part of your funding strategy.
Choosing the ideal Invoice Discounting provider is a minefield and the Growth Gurus have access to all providers.
Bridging
This type of funding is known as ‘Bridging’ because it’s designed as a short-term solution for your business.
You can also use Bridging when buying or refurbishing property as well as growth capital.
Rates vary considerably and are dependent on many factors. Expect to pay more than twice the rate you pay for longer term secured loans.
There are a vast number of Bridging providers and the Growth Gurus have access to the whole of the market.
Top Tip. Don’t be tempted to over use Bridging when less costly options are available.
Asset Finance
Asset finance enables you to finance assets you need to run your business. Asset finance avoids the need to use your precious cash. After all you need the cash within your business and not tied up in assets.
Assets can include, office equipment, vehicles, machinery etc.
You can also refinance the assets that your business already owns to raise the funds you need.
Asset finance may cover all of these areas;
• Refurbishments — furniture, ceilings, flooring, lighting, partitioning, security
• Vehicles — Cars, Vans, HGV, Fork-Lifts, Trailers. (Business & Personal Finance)
• Plant & Machinery — All Yellow Plant and Construction Machinery
• Engineering & Manufacturing Equipment — Production lines etc.
• IT Equipment — All Hardware & Software (Including Annual Subscriptions)
• Office Equipment –Printers, Photocopiers, Telephone Systems, Furniture.
As with any other form of funding, there is a plethora of providers and their rates and criteria vary considerably. The Growth Gurus have access to the whole of the Asset Finance market.
Overdrafts
An overdraft is by far the most common form of business funding for small businesses however it’s also the highest risk, likely to be painfully expensive and highly addictive.
Overdrafts can be withdrawn or reduced with little or no notice and should only ever form a modest part of your funding mix.
Top Tip If most of your funding is based on an overdraft facility then you should call us immediately.
We have witnessed hundreds of excellent businesses fail because they relied too heavily on their overdraft and the facility was withdrawn without any reason.
Trade Finance
If your business buys from oversees then you could benefit from Trade Finance.
Trade Finance funders pay overseas suppliers on your behalf to enable the import of goods into the UK.
They will often fund up to 100% of the landed cost of stock, including VAT, Duty and Freight charges.
Funders often pay deposits to suppliers prior to the manufacture of products.
We have access to all the Trade Finance providers in the UK and can source the ideal funder for you.
Stock Finance
Stock Finance is designed for companies who hold a great deal of stock to ensure that they can always supply their customers quickly.
Firm orders for the onward sale of stock are not always possible in today’s commercial environment.
There are only a few stock finance providers with rates and criteria varying considerably. We have access to all the Stock Finance providers in the UK and can source the most ideal funder for you.
Other Peoples Money; In Conclusion.
Most highly successful businesses tend to use a combination of most of these funding options.
Throughout your businesses development the proportions of each funding method will need to change
The challenge is getting the balance right and this is where The Growth Gurus can help you.
We have yet to meet a successful business that has not fully taken advantage of Other Peoples Money!
Selling Your Shares
Private Equity Investment
This form of funding entails sourcing investors who are willing to invest money into your business in exchange for shares.
Many believe that raising money by selling your shares should only be considered if you have no choice.
You will be selling your shares one day and selling a proportion very early in your development may result in you regretting the decision when you realise that the shares you sold in the early days are now worth £millions.
What can be even more upsetting are the restrictions often placed upon your activity. Lets face it, selling shares means you lose some or a great deal of control of your business.
Private Equity investment is a great idea, when your debt funding options are limited.
Private Equity Investment comes under many names; Angel, VC and EIS fund.
You will need to prepare well if you wish to attract investors. You will need to create a business plan and Deck that will be appealing to investors.
If appropriate, you will need to seek pre approval from the HMRC to gain SEIS or EIS status.
SEIS and EIS is a scheme where the investor receives a considerable tax benefit. Having SEIS or EIS status will often improve your investment provider options.
Top Tip You will need to pitch your business to investors at a number of pitching events. Preparing for this takes expert tuition so that when you pitch to investors, you will put across a great message to increase the chance of an investor deciding to invest in you and your business.
Top Tip. Business Angels are not always as angelic as we would want them to be. There are a number of Angels who may have nefarious reasons for investing in your business. Such investors may create traps that may result in them taking over your business.
Crowd Funding
Crowd Funding is a form of equity finance and can raise considerable amounts of money, however, raising the money is likely to be both challenging and very time consuming.
Preparation is key to the success of raising money with Crowd Funding and the whole process will take at least six months. This is contrary to what most platforms may tell you.
That’s possibly because you pay them to list on their site and they have no interest in telling you that raising funds on a Crowd Funding site is very hard work.
One of the other downsides of Crowd Funding is that it will result in the loss of a proportion of your shares.
One other negative aspect is that you are showcasing your great business idea to thousands of people and you may find yourself with a competitor copying your business model.
If you are happy to spend a great deal of your time dealing with a raise with a Crowd Funder and you don’t mind giving away equity, then Crowd Funding may be perfect for you.
The Growth Gurus have a great deal of experience in raising funds this way.
Free Money
R and D Claims
An often-overlooked method to create a proportion of the growth funds you will require is a Research and Development (R and D) claim.
The average claim for a client is £40,000 and you have no need to sell your precious shares or repay the money.
If you have developed your process, systems or products then it is likely that you could benefit from a Research and Development claim.
This may result in your business receiving a cheque from the HMRC, even if you have not paid them anything.
There are many consultants in the market to choose from and the Growth Gurus have a panel of the most experienced.
Grants
Securing grant funding could really help your business develop and grow. However even experts can find it difficult to keep track of the hundreds of different grant schemes, which keep appearing and then disappearing.
You need to identify relevant grant schemes and understand whether your business is likely to qualify. You also have to understand the application process and decide whether it is worth applying.
You must be ready to put up some of your own money.
Grants typically cover 15–60% of the total finance required for a project. It is extremely rare for a grant to finance 100% of the costs of any project.
Even if a larger proportion of the project cost is available, you will still need to invest time and resources in researching and applying for the grant.
There are many Grant consultants in the market to choose from and the Growth Gurus have a panel of the most experienced.
We hope this blog has been of value
A well balanced funding strategy is critical if you wish to fuel the growth of your business and build your own wealth.
You will need to ensure that you utilise the most appropriate funding options available to you and to achieve this you may need advice.
Our funding team at the Growth Gurus have over 25 years of experience in raising money and because we help in other areas to grow your business we tend to be far more proactive in obtaining you the ideal level and type of funding.
This article was written by David Hargreaves the chief guru, principle ‘dreamer’ and the walker of the office dogs at The Growth Gurus
About David Hargreaves
David is a seasoned and accomplished entrepreneur who’s first business was started at home and grew to a turnover of £12m before David’s Exit.
David is passionate at helping business founders to be the best they can be, to make pots of cash by serving their customers and to have a happy family life.
About The Growth Gurus
The Growth Gurus turn dreams into reality.
The Growth Gurus ensure that you build a sustainable, high growth enterprise that can be scaled whilst having fun.
We achieve this by giving you access to our network of experts in all the areas you will need, whether this is helping you to increase sales, funding to fuel your growth, team building, mind set coaching, systems development etc
We also have access to over 300 funders many of whom would love to fuel your growth with other peoples money