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Financial Insights
Business
Funding
Growth
You’re ready to grow and need some cash to make it happen, but where do you get the money from? Once you’ve exhausted your personal funds, you're left with two main choices: equity vs. debt.
Equity financing involves finding an investor who provides money in exchange for a portion of your business. Debt financing means borrowing money that needs to be repaid, usually with interest.
There’s also a third option—grants. While loosely grouped with debt, grants usually don’t need to be repaid but often come with spending conditions. Plus, you don’t give up any equity.
The main benefit of raising funds through equity is that you don’t have to repay it. But, you give away a chunk of your business. It can be tough to secure, with less than 1% of businesses succeeding. You’ll also gain a partner in the business, which can be both a blessing and a curse depending on their involvement and compatibility with your values.
Equity funding can cover your cash flow for at least 12 months, giving you the confidence to focus on growth. But beware, some founders may become complacent with a 12-month runway. Your exit strategy needs to align with your investor's desire for a profitable exit.
The higher your business valuation when you raise equity, the less it “costs” you in terms of ownership. Aim to get your valuation as high as possible before considering this option. However, it's a delicate balance to weigh up.
Grants
For the most part, grants are free money! Availability varies by location and sector. Your accountant can help identify potential grants. Keep in mind:
R&D Tax Credits
Most innovative businesses can benefit from R&D Tax Credits. Partner with your accountant to determine your qualifying expenditure and potential credits. These submissions align with your annual accounts and tax returns, so timing may not solve immediate cash needs.
Beyond traditional overdrafts and fixed-term loans, there are several other debt options to consider:
Overdrafts and Fixed-Term Loans
Straightforward and relatively easy to access, but shop around for the best rates. Use overdrafts for short-term gaps in working capital and loans for planned expenditures.
Credit Cards
Easy to access but typically come with high interest rates. Use as a last resort.
Invoice Factoring
Sell your unpaid invoices to a third party who collects the debt from clients, paying you a percentage upfront. Useful if you have slow-paying clients, though it can be expensive.
Asset Financing
Raise funds tied to physical assets like vehicles or equipment. Refinancing existing assets can also be an option to raise additional funds.
Merchant Cash Advances
Payment processors like PayPal and Stripe offer advances based on transaction volumes, deducting repayments from future sales.
Credit Terms
Negotiate longer payment terms with suppliers to free up working capital.
When choosing a funding partner, find one who understands the available products and can shop around for the best rates. Don’t settle for the first offer.
Consider whether debt options can get you further, hit a higher valuation, and then raise via equity. Balancing the complexities and length of equity raising with available debt options is crucial. Your growth plans and cash needs will dictate the best approach.
Having a strong financial model and cash flow forecast is key to understanding what funding to take on and when. If you need an introduction to our funding partner, feel free to message us!