Business Clinic: Early stage funding

Expert advice on the business of running a garment decoration company

Q&A

I want to make printing my fulltime job: what early stage funding options are available to me? Many business owners believe their personal bank is the only option for business funding, but this couldn’t be further from the truth. So, what alternative funding options are there?

Personal and family loans and remortgaging

Definitely a valid option, but you will need to consider whether you have sufficient finances to run the business and maintain a contingency fund should it be required (for example, the business isn’t as successful, or your partner is made redundant, etc).

If you choose the family loan route, prepare a properly drafted agreement so that the terms are clear from the outset. Both sides should consider how they will deal with the worst-case scenario of the business failing, both financially and personally.

When remortgaging a property, the interest is usually lower than that charged on a personal or business loan, and the repayment terms can be far longer. It is vital, however, that you, and anyone you share your mortgage with, are happy to put your property up as security for the bank.

Another option is an unsecured personal loan: the interest rates are often lower compared with a business loan and there are also no arrangement fees. There may also be other perks, such as gift vouchers/ reward points. Weigh up the options, and take expert advice if necessary.

Bank loans

Contrary to what you may have heard, all high street banks are willing to lend money to start-ups – after all, lending money is one of the reasons they are in business! Even though there is money to lend, and a variety of government and bank-led initiatives, it’s important to approach the bank in a professional and knowledgeable fashion. Prepare well, and make sure you can answer any questions confidently and consistently.

Leasing/hire purchase

For asset purchases, it is often prudent to consider whether the item can be purchased using a lease or a hire purchase agreement, which is itself secured against the asset.

There are two types of leases. With an operating lease, you’re merely renting the item; with a finance lease you’re purchasing the item. Banks will expect you to consider these arrangements when you are looking to fund a start-up with capital assets, as it spreads the funding risk for them.

External seed funding

Typically, a seed-funding round would be in exchange for equity. Because of the inherent risk of a start-up, often the valuation can look extremely low from the entrepreneur’s perspective. It’s vital to consider that this is probably one of the riskier personal investment strategies from the investor’s perspective, as they may have little or no involvement in the business and hence no control of the destiny of their investment.

It’s vital to agree on the key terms of the deal, including whether the investor’s capital is repayable in any way, whether there is to be any salary for the entrepreneur before the profit is divided, and the general day-today conduct between investor and entrepreneur. It’s also wise to agree on a structured exit strategy, with a predetermined valuation mechanism, so that both parties have certainty over how the relationship will finish.

Crowdfunding and peer-to-peer lending

Peer-to-peer lending is a relatively new way to access finance, through websites such as Zopa, and allows members of the public to invest their money into these loans. This is a funding avenue that is open to most individuals with a good credit history. Crowdfunding is also fairly new, through websites such as Kickstarter and Crowdcube. There have been a number of successful fundings through these sites.

It’s important to decide whether you will raise funds via a promotion (such as seen on Kickstarter) or by issuing an equity share to the fund. Many businesses have offered their products for a discount, together with limited edition ‘early bird’ versions for early adopters at a premium price. These pre-orders have enabled them to raise their funding requirements without giving away any equity whatsoever. However, not all businesses are able to do this, so a share of equity might be necessary to raise the required funds for your new printing business.