Equity financing is the best way to raise funding for a start-up or a reputed company in the UK. All the business lenders are the creditors, and this capital helps any business with their capital buffers, and expenditure towards research and development expenses (R&D) is managed.
There are many ways to raise capital for a business in the UK, but there are certain loopholes and advantages of taking money from direct lenders present online.
There are direct lenders in the UK that are present offline and online, answering the ever-important apprehension of I need money now.
There are ways and measures of equity financing in a business that help a company raise money at the cost of diluting the stake in a company. Here it goes:
Sources of Equity Financing
The primary financing source for a start-up, small and medium-size business is the owner’s money or borrows money from their friends and family. After some time, when the need for capital is higher, and the personal savings and profits generated from business are inadequate, enterprises look for external funding sources.
This is where venture capital, angel, and private equity investors come to the picture that lends money to these start-ups and businesses and takes equity in these companies and a board position.
This is a lucrative funding source as these funding amounts are significantly higher than what a commercial bank or a direct lender will give. Besides, banks will ask for collateral and also put several restricted covenants, which can be frustrating.
Crowdfunding is another popular source of funding adopted by many entrepreneurs these days, wherein they raise a small amount of money from a pool of several investors.
Business Angel Investing
You now know why angel investors and raising money from VC/PE investors are the best option to get a high amount of money for a business. Business Angels are investors who invest a hefty amount in your business as funding and, in return, ask for a certain number of equity shares of your company.
Also, these are knowledgeable people who will advise you on certain aspects of your business. Thus, you get expert advice apart from money. Let’s now look at some other facets of angel investing:
- Angel Investment Compatibility:
There is no shadow of a doubt that you will get a fair amount of money from these angel investors, but the big question is at the cost of what?
- Are you willing for equity dilution to get the money?
- Are you ready to sell a portion of your business to the investor?
- Would you be able to give a board position and thus the controlling rights to the investor?
- Have you thought about plausible conflict of interest and delay in decision-making after the angel investor is on your company’s board of directors?
There is no shadow of a doubt that an angel investor is well equipped to provide advice for your business but does he know your vision and mission and your premise behind starting this business? These are some of the pertinent questions you as an owner must ask yourself.
- Searching for an Angel Investor
An angel investor will not approach you making an investment offer. You have to reach out to them and pitch your business idea to raise funding. Build your network, meet more and more people and interact with them.
You can use various modes of advertisements in print and television media and on billboards to promote your brand and get noticed by investors. There is a trade association in the UK and the name The UK Business Angels Association (UKBAA), an industry body that you can use to find the ideal angel investor for your business.
You have to come across as a credible company as this financing mode is different from unsecured business loans offered by direct lenders.
- Pitching Business Idea
After you have identified the right angel investor for your business, the next stage in this process involves pitching your business model and your expansion plans for the business in the future.
Ensure to include numbers and statistics in your presentation, make financial projections and present them with all the calculations. Angel investors are usually very busy so that you won’t get much time for your pitch, so draft a concise yet practical presentation to impress them.
You will have to convince them why their money will provide returns in the future, where you intend to use their money, and how it will benefit.
- Ideal Angel Investor
You might get funding approval from the first angel investor you met but before coming to an agreement with him, make sure to assess whether his priorities match your need or not.
Don’t be greedy right from the start to get the money. Look for the investor’s intentions towards your business, his conditions, equity stake he is asking for, judge whether he will not intervene in your business affairs and decision making.
Look for other companies he has invested in and seek feedback from them about the angel investor. Thus, avoid any grey areas and keep everything black and white right from the start.
- Investment Process
The investment process is usually time-consuming, and thus be prepared for that; check whether the angel has sufficient funds available to lend you. Sit with the investor and negotiate all the plausible loopholes and issues in the contract, acting as an impediment in the future.
Check from the regulatory and legal angle to see there is no potential hurdle to this deal, and all norms are being complied with. See whether everything is properly documented with multiple backups of crucial information.