Cash is key for any start-up business. Raising funds for a new venture can be overwhelming, but with an extensive support infrastructure in Northern Ireland, and the availability of an ever increasing choice of alternative funding options, there is more support than ever for start-up businesses. Some of the key types of funding for start-ups are set out below:
Businesses in Northern Ireland may attract the benefit of government grants aimed at helping new and existing businesses grow. Grant funding is the best form of funding for start-ups that are not keen to take on too much debt, or give away too much equity in the business, particularly at an early stage.
It is important for you to consider which grants are most appropriate for your business (the Gov.UK online grant resource, ‘Business Finance Support Finder’ (https://www.gov.uk/business-finance-support-finder/search) is a handy tool to help you start). Each grant application should be tailored with the particular grant funding requirements for that scheme in mind.
Bank or family loans are not the only funding options available to start-ups. Loans are available from many alternative sources, such as cash-rich individuals experienced in the industry, or loan funds, both of which could bring experience and guidance to the table, in addition to money.
This type of funding, known as debt funding, involves lenders lending the money to your business under a loan agreement. You will be legally bound to the contractual terms you sign up to, so it is important to check the terms of your agreement carefully. In particular, you should take care when signing any document that commits you to providing a personal guarantee (i.e. creating an individual liability) to your lender as security for your business.
Debt funding may require security to be put in place, either in the form of a floating charge over all the assets of the business, or a fixed charge over individual high-value assets. Any security will impose strict restrictions on how you can deal with such assets.
Alternative Debt Funding
Debt funding doesn’t have to be a simple loan of money with a set time for repayment.
Debt funding can be structured to suit the needs of the business such as invoice discounting, asset finance (for key assets such as machinery or vehicles) or trade finance. Business owners should take time to understand what best suits the needs of their business.
The term “Investment” is traditionally associated with raising money through the sale or issue of shares in the company (as seen on Dragons’ Den). This is known as equity finance and can include finance from, among others, venture capitalist firms, business angel investors and crowdfunding.
These investments involve giving investors shares in the company in exchange for cash. Investors will normally require all shareholders to enter into an investment agreement regulating the terms of their investment.
When taking in equity funding, consideration should be given to how much of a stake in the business to offer investors in return for their investment.
It is very important that there are synergies with the investors and they can bring value to the business beyond simply their cash investment, such as experience in the industry or business connections.
Crowdfunding is the process by which a number of people each invest in a business or idea in return for a share in the business (equity crowdfunding), a return on their investment (debt crowdfunding) or another benefit, such as a discount on products or services (reward crowdfunding).
Typically, a company seeking funds will set up a crowdfunding campaign through a crowdfunding platform and the campaign is then promoted through social media and other channels in order to attract investors.