Moving on from the Commercial Loans and the Commercial Mortgages section, I suggest we eye a completely different field. In my part 3, I would like to touch upon 2 alternative funding streams. Both equally attractive and amusing, with the Government funding being the one easier to apprehend and bid for. Yet again, both ways have their strengths and weaknesses and appropriate to some approaches more than others.
Honestly, not the easiest option of raising funds if your business is fully self-owned or in fact a public company with a lot of members.
Simplifying the official definition in plain English and defining it in the way to help you understand what it is – Equity Financing is the way of raising funds through the sale of shares of your company. This is when you are opening up your company to the outside investors or members of the general public, breaking up its total value on “shares” and selling those individual shares off to individuals or companies or both, to raise the Capital…
Usually raising of Capital in that way is done for the purpose of diversifying the nature of the company or when owners are looking at rapid expansion, sometimes it is used for raising liquidity during mergers of companies operating in the same or similar sectors with a focus on joint-working, cost reduction or winning market share.
Not every company will be able to do that and certainly, the start-ups or young enterprises are advised to look at other ways of raising capital when they are considering Equity Financing. However, the successful start-up will most likely experience few waves of equity financing due to the nature of their trade, as by rule of thumb, these attract investors from varying fields. The smaller the company, hence the earlier it’s step, the less likely that opening its shares to the Public will commence.
Sometimes your business model will not allow you to sell your shares, you might not be the sole owner of the company or your share in the enterprise is not sufficient (%-vise) to raise substantial capital to deliver the projected growth.
If your enterprise is established than you are first will be inclined to consider support of Venture Capitalists, those usually are wealthy individuals who are keen to become shareholders by investing their personal funds into the company if satisfied with its future course or nature of trade. That way the Capital can be raised in large amounts through singular sources, quicker and will be easier to manage. Alternatively, the shares, as mentioned, are being opened up to the resources of the general public.
It will hopefully become clearer in Pros & Cons of this approach below:
- Catching up on the previous part of the Commercial Lending I can state with confidence that your first advantage will be lack of “interest rate” and zero repayment costs which come with the lending side of funding. There will be no ongoing costs and the Capital raised can be poured back into the business and utilised for growth or realisation of the planned course of action almost immediately.
- You might pick up ideas on the go. You will, by all means, have the plan for growth underpinned with business performance and the analysis charts, but in the process of finding the investors, you might also come across the new ways/suggestion of running the business or delivering a certain type of a project. Investors will want to gain the return on their investment, the soon it comes the better and the better the business performs – the greater their return might be. Meaning that growth ideas and ways of detailed plans of their execution might start pouring in from third parties who will become direct beneficiaries of your success.
- When you grow your business – you grow your reputation along with it and if your investors are truly interested in you and the ‘baby’ you nurture the likelihood of them ‘jugging’ along by your side in the future is rising with your profits and market increasing. If the funding pays back and the business is successfully undergoing transformation and grows – you can almost be certain that those invested in your ‘initial steps’ will carry on supporting your future ideas. With the investors, of course, come connections, ‘open-door’ opportunities and strengths.
- Not all businesses will be able to commit themselves to such type of funding venture. Some owners will simply run out of time trying to secure the necessary funding and get bogged down in the administrative burden that comes with it. Don’t forget – it costs money. This type of financing of your business will bring frontal costs.
- Angel Investors and Venture Capitalists are not ‘dummies’ and will not throw their personal ‘hard-earned’ monies at amateurish wishful thinking. They will want you to provide them with your past performance, present successes as well as detailed analysis of future opportunities and strengths forecasts. You will have to provide a break-down of your operations and means of delivery and be prepared to answer difficult, stingy questions on any ‘performance stumble’ which might have occurred and attempt to blanket it with a reassurance that the history won’t repeat itself. Get cracking writing your Memorandum or Prospectus (as it is known) now.
- Depending on the country of your residence, or rather the county of your business registration, the governance of Equity Financing is undertaken by the ‘legal scriptures’ of the state and usually the special body formed for regulation of such deals. Such authority will have a say on the substance and the execution of the deal. Read into it carefully as non-compliance with those regulatory set-ups might cost you dearly. Simple things as advertising of your desire to raise funds done wrongly might result in hefty fines. To understand those you are advised to seek legal guidance – *adding on the costs*
- Do not forget that you might end up having a lesser share in the business, if you are not it’s sole proprietor or planning to sell off increasingly high % of share. It might turn in your favour if you will develop it strength-to-strength and the lesser % of shares in your ownership will have a greater value, but it comes with a big “IF”
Government Funding Schemes
One of the most famous ways to raise funds and finance your business will be the good, old Government Schemes of Funding. Be it an industry, a social enterprise, a small firm an LTD – there will be a scheme suiting your needs. Finding them is a pain but most of the GOOD GOVERNMENTS publish sufficient details on their official websites and provide the fair amount of explanation on your ‘next steps’ if interested.
Government Funding is the entirely different matter to debt funding or raising capital through the sale of stock and shares. There are thousands of schemes available and I won’t physically be able to cover even a fraction of them in 1000 words left (to avoid putting you into sleep….only into slumber).
Depending on the nature of your business and its legal structure you might be qualifying for more funding pots then you could imagine. The good government wants to support its entrepreneurs for two BIG reasons: the trade generates VAT returns and invests into the economy and the Entrepreneurs brings revenue through their Income Tax, business rates, interest charges and other means.
This is an example of the basic site listing biggest government pots. There are hundreds of those across the net and you will most likely come across thousands of third-party brokers who will be ‘happy’ to guide you to the right type of funding for you and carry out an assessment on your behalf to find out if your company qualifies. They earn their living through a deal completion (usually a % of the total) and initial promotion of those pots of money —>
So what are the strength and weaknesses of it…let us pick top 4 for each.
- Your first grant/gov. funding application will always seems to be difficult to complete. Usually, the application form is 30 pages (and counting). However if you overcome this hurdle once and get rewarded in successful confirmation – you will be pleased to learn that most forms are identical and the only difference would be in ‘purpose’ description section where you will have to outline “why do you think you should qualify for a particular money pot” and “what makes you different from other similar service/product providers”.
- Subject to the amount you are hoping to qualify for the criteria might be vague and you might be able to adapt and adjust your project or service to suit the expectations of the funder. ‘Seal of Government’ does not always mean that money will come from the state, most of the times the state vouches for Trusts, Charities, etc meaning that you can contact the funder directly and negotiate the deal if you are operating in the specific niche.
- If you have been told you will get the money – you will get the money. Funders publicised through government website or federal departments are checked over and vetted to the State standard meaning that you will not be left out as soon as you will start your project or your business, at least not at the initial stage. Usually the state secures the pot and offers to reimubrse costs incurred by you at not your fault (all subject to Terms & Conditions).
- It is a great way to build your good name and genuinely deliver the service or the product which will benefit the industry you are operating in or the community you are working for. The good name will help you find new ways to grow your business and some private sources of funding might contact you offering contracts, partnerships or joint-working.
- “Been and gone”. This is my favourite way to describe Government Schemes to my followers and clients. — What do I mean by that? — Imagine you have applied to get £50K to fund your social project tailored alongside your capitalist business model and you have been told that you will be paid in chunks over the course of the year with 2 instalments of £20K and a final £10K in the fourth quarter of the year. 9 months gone just fine and you have delivered what you said you will – but the last £10K are not coming through… You are dubiously trying to contact the source just to find out that the pot has lapsed, gov support has been withdrawn and you are £10K out of pocket. Happy days! Such is the reality. If the funding will get pulled – you might end up out of pocket, so be mindful about an ability to ‘warp-up’ your project in case of a sharp u-turn.
- There will be times when, subject to what you are doing, fitting the criteria of a funder will be impossible. The number of changes that you will have to make will only increase your administrative liability and at some point, you might decide that the potential pay will not be worthwhile of delivery of the service and all the time that you will put into it.
- (this is what it is like in the UK, your country might have a different take on things) You will have to report on every single penny given to you. If you are successful in qualifying for a Government Scheme – be prepared that your competitors (who lost) will be watching your operations closely and Media will be upon you comes the time of the in-year reporting on performance and delivery as well as reporting in operation costs (God forbid you will stretch out to ask for more claiming it costed extra to what you have projected).
- The competition is immense. You might find yourself in the situation of bidding on the tender against the great number of other companies. In order to become ‘the chosen’ candidate, you will have to be innovative in your approach, offer truly unique service in a cost-effective manner. if you are a small enterprise with shortage on buyin power – you can forget competing against multi-branched national charities or trusts or CICs established in the field as they will always be able to bid less on government tenders and their applications will receive favour due to their credibility.
So far I have lightly touched upon the
- Bootstrapping + Friends & Family
- Commercial Loans + Commercial Mortgages
- Equity Financing + Government Funding Scheme (the stuff you just read)
Lets see how useful the upcoming Funding (part 4) will be for you.