Funding

Getting the funds

A key issue for any such businesses therefore, is how to meet an identified funding requirement so that the business can reach the next stage of its development.

The identification of a funding requirement, ideally over a year before it is needed, is one of the key outputs of a business plan. Once a company is operational it’s important to regularly update financial forecasts to allow the management team time to raise funds before a lack of funding becomes critical to the business.

Once a funding requirement has been identified there are several different types of funding, the suitability of which will depend upon where in its lifecycle the business is. It is important in deciding to approach any individual or entity for investment to have carried out your research properly so that you ensure you only approach those whose investment criteria you fit.

Read more in our factsheet

Grants

Grant funding is typically money provided by an agency with special interest in the technology area a business is working in. In the UK, the usual sources of funds are:

• Innovate UK (the Government agency for innovation)
• Other Government departments  
• Medical charities

Grants are applied for through funding competitions. In applying for a grant it is critical to ensure that your company fits the grant criteria. Some grants are made based on ‘matched’ funding, so when making an application it's important to identify where that funding will come from.

Read more in our factsheet

Equity

Equity essentially comprises funds invested in a company in return for shares in that business.

Companies at every stage of their development may raise funds from the issue of equity shares, but the nature of the investor is likely to change as the company enters different stages of its development.

Business angels

These are high net worth individuals looking for investment opportunities, who will also often act as a source of expertise for the management team. Many of them will have significant experience in the technology area - perhaps having successfully exited from another business.

The typical investment size for an individual business angel is £25,000 to £250,000 but some can go as high as £2m for the right opportunity. As the average individual investment is fairly small, angels often like to invest in syndicates, spreading the risk across all investors with one angel taking a lead role. They will usually look to exit the company within 3-5 years.

Business angels offer more than just funding; they bring expertise and experience. However, they can be hard to find, and managing the interests of multiple angels can be challenging - approaching them through an intermediary or network can simplify this.

Venture Capital & Venture Capital Trust

Venture Capital are investment funds seeking high rates of return on investments which are typically upwards of £2 million. Some funds are targeted at making investments below this value depending upon the sector and region. These funds are looking for companies with a high earning potential that are able to offer a defined exit plan and timetable, usually in the form of a sale or flotation.

Venture Capital Trust are funds that enable their investors to participate in investing in a portfolio of smaller VCT-qualifying companies. Typical investment size would be from £200,000 upwards. Business angels and Venture Capital Trusts will typically want to be able to access Enterprise Investment Scheme or Seed Enterprise Investment Scheme tax reliefs when they invest, so it is useful to be prepared for this and to ensure that the company and its shares will qualify.

Read more in our factsheet

Crowdfunding

Crowdfunding is an internet-based conduit whereby a number of (typically) individuals can invest in or loan funds to an entity.

Entities that have raised funding in this way include political campaigns and not for profit campaigns as well as funding for businesses.

In the UK, the Financial Conduct Authority has imposed restrictions around the level at which individual investors may advance monies.

Debt financing

Debt finance will usually only be relevant in circumstances where a company is revenue and profit generating.

Overdrafts and bank loans are common sources of debt finance, but before lending, a bank will want to know that the company is a good risk. Typically, the company will need to present a credible business plan, provide evidence that the management team are competent and have a successful track record in business.

Whatever the type of borrowing used the company will probably have to pay arrangement fees as well as interest, where the terms and rates depend upon the bank’s risk assessment of the company and repayments can be very flexible to meet specific needs.

A bank lender will also require some form of security, either from the company (the company’s assets), or from the directors (personal guarantees), or both.

Convertible loan notes

There are occasions when investors in a company choose to invest by way of a loan that has some optionality to convert to equity given particular circumstances. Some investors prefer to invest in this way rather than directly into equity.

Where a fundraise is taking a while to complete, sometimes the investors who are already committed will take convertible loan notes, which will convert to equity once the full round is complete. The terms of convertible loan notes can be very flexible.

Business relationship funding

This is a source of funds that can be overlooked - it may be possible to introduce potential alliances to add value to both parties and could produce an ultimate exit route in the medium to long term. These include: 

• Agencies
• Alliances
• Franchises
• Joint Ventures
• Joint working relationships
• Licensing
• Partnerships
• Trade or strategic investors

Read more in our factsheet