When you’re starting a new business, perhaps you have savings or a redundancy pay out to draw upon to help you begin. You might not need much money to get your business off the ground, but it’s helpful to have working capital.
So, if you need a cash injection to help launch or grow your business, where can you look? There are various options, the enterprise investment scheme (EIS) and the seed enterprise investment scheme (SEIS), to lenders and investors.
Which approach is best for you?
Cash at no cost?
The most attractive option is to investigate whether there is money available at little or no cost to you, such as seeing if your business qualifies for a grant.
Grants are most likely to be available if your business is developing an innovative product; or it has a positive impact on the economy, say job creation; or is doing something “green”.
If your work is innovative, you might be able to apply for Research and Development (R&D) tax credits. We claim these retrospectively after you spend money on qualifying innovation, but this should be on your radar from day one.
Investors (see below) would expect you to be making use of all funding like this, if available to you.
As you might expect, grants and tax credits may well not be readily available. If your business doesn’t qualify, you could explore your borrowing options.
Lenders, typically high street banks, have a range of products to assist growing businesses. These are products you will be familiar with from personal finances, such as loans, overdrafts or credit cards.
The benefit of borrowing, over seeking investment, is that you keep all of the equity in your business. It’s worth taking some time to find the right borrowing option for you. You may not conform to every product’s lending criteria and repayment terms will vary.
While you retain equity, there will be a cost to borrowing – interest payments and maybe arrangement fees. And, of course, you will have to repay the capital lent on the agreed terms.
It might be appropriate for you to consider looking at investors.
Seeking investment can be costly. It usually involves giving up a share of your company value and future profits to your investors and this could be a significant amount.
It will be the best option for some businesses. After all, it would be preferable to own a smaller share of something very successful than a complete share of an unsuccessful business.
Another option is to look for an angel investor.
This could be a Dragons’ Den style of investment where your investor supplies the cash in return for equity, but they may also support your business in additional ways. For example, you might be able to draw upon their expertise for advice, mentoring, contacts, or resources from their other businesses.
This might be exactly what you’re looking for but be aware that with an angel investor on board, they may well want active input into how you run your business.
Another option is to explore investment schemes such as SEIS and EIS. These schemes help you raise money from experienced investors who want to support start-up businesses and benefit from their growth. Your investors receive shares in your business as well as tax relief on their investment.
Under these schemes, you are more likely to keep the control over decision-making in your business, but you’re unlikely to get mentoring support from these investors. There are also HMRC rules to comply with.
In contrast to borrowing, opting for investment means that you don’t have the pressure of meeting interest and capital payments of a loan, overdraft, or credit card. But investors will have expectations about share growth and profits, which might weigh heavily on you.
How we can help
Our experts can help you navigate the options for raising funds to launch or grow your business. They’ll help discern which option is right for you, in line with your immediate needs and long-term plans. Please get in touch to discuss it with us.