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5 sources of funding

February 1st, 2017 Posted by blog, luke 0 comments on “5 sources of funding”

written by luke streeter [blog]

the bank shouldn’t be, and probably isn’t, your first thought when it comes to funding, it has its place, but it’s not on the top of my list!

entrepreneurs and owners of startup or scale up businesses are often either in the process of fund raising or will be thinking about doing so very soon. however, this isn’t just an issue for growing businesses but also for established ones too. in my blog I write about some of the different sources of funding available – from experience, many businesses forget to look closer to home.

I have broken this into 5 different areas:

  1. customers (and word of mouth)
  2. staff
  3. suppliers
  4. investors
  5. banks

1. customers (and word of mouth)

selling more can be a free source of finance so is number 1 on my list.

the zenith for any business is when their product or service is so hot that it funds itself, selling to new customers or upselling to existing customers. sell more, collect the cash, grow. you obviously need to collect the cash but with so many businesses operating a SaaS or subscription models these days, collecting cash is often not necessarily the issue. even professional services and coffee  have taken the route of a subscription basis (read our blog on why every business should consider a subscription model). there is always the risk of overselling too early as well, not keeping up with demand, the quality dropping and therefore word of mouth having a negative effect. both nice issues to deal with though but a topic for another blog.

there is of course the very valid point ‘I don’t have a product/service yet as I am pre-launch’ in which case think about staff below (in particular the family point), but once you have, make sure you consider the above!

2. staff

an often overlooked area beyond the initial founders, I’d certainly recommend having that key developer or top sales lead tied into the business!

I have seen this in 2 main forms, 1. their hard-earned cash or 2. deferred/sacrificed salary. both unsurprisingly have the major positive of an incentivised workforce who are very keen to succeed. it’s no longer just your cash, house or even kids university fund on the line, it’s now theirs too! many startups don’t have the cash to pay their first employees but you could give them share options (EMI are often the best) or ask them to have a pay freeze so the business can grow and reward them down the line. established businesses often look at the senior management team to invest in the business, sometimes resulting in an MBO (‘management buy-out’) – it also ensures the continuity of key staff.

I mentioned family, they are normally very trusting and may not want any return but the amount available may be the issue here. I haven’t listed this separately as family is often an extension of your own starting fund.

3. suppliers

a source of finance that won’t cost you anything, any business would be stupid not to consider it.

harder if you are a tech scale up or your suppliers are all SaaS providers that you need to deliver your service, but still very important to consider before giving away large chunks of equity. if you have a more traditional business model and buy stuff before you do ‘your thing’ and then sell it, agree extended terms to free up working capital and cash! ordering more is a sure-fire way to keep the supplier happy. you’re not actually giving anything in return for this source of finance so it can be one of the cheapest forms of funding (along with just selling more).

there is also the flip side where you pay suppliers early to get take advantage of prompt payment discounts but here we are talking about sources of funding, not working capital management.

4. investors

whilst lower down my list, as the value of funding increases this will be a more likely route of funding but more expensive in the long run compared to the previous options.

perhaps what you were expecting this blog to be about from the title, and certainly the most common if you’re looking to raise a significant chunk of money as the above are unlikely to raise £1m fast (although investor funding is never ‘quick’ per se). this can come in many different forms (I’ll write about these separately very soon) such as the type: debt v equity, and the route: traditional v alternative. investors will of course expect a return, in the form of interest or equity, so very quickly it will cost you a lot more.

for larger amounts a PE (‘private equity’) or VC (‘venture capital’) firm may also want someone on the board, will they have the same mind-set as you and the founding team? will they distract you? the positive here is that they will also have expertise and contacts to offer, it can be like dating though – you will need to find the right one so get yourself out there, make an effort, tidy yourself (forecasts, assumptions, business plan and pitch) up! there are also lots of options out there before you need to go to your bank, there are crowd platforms, some may ask for no security (interest will be higher), so look around, consider grants (free money but smaller amounts) or funds (normally from LEPs – Local Enterprise Partnerships). ‘The FSE Group’ has a good fund finder on their site (www.fsegroup.co.uk).

5. banks

traditional but becoming less a common way to source funding for a scale up business – not when there are so many good alternatives anyway!

last on my list and the most traditional route of funding. whilst some credit should be given as banks are becoming better, there are still several issues. for an sme you’ll likely be one of 50 in a portfolio, have no personal touch and get no other expertise/skill-set from your investor. this will typically be secured funding too, so for a scale up with no premises, what security can you really provide? don’t rule this out but make sure you have a pretty solid business plan, 5 year forecast and know exactly what you plan to spend the money on.

final thoughts

each of the above have their merits and one answer will of course not fit all businesses, but from my experience customers, staff & suppliers are the areas to consider before getting an investor on board, particularly in your early days as all you may have is a great team (a good idea is a given these days, what else makes you different?), so if you can motivate them while also tying them in, all the better!

whilst lots more could be said on all 5 above, hopefully its broadened your view or highlighted some new options. in my opinion, it is only be a matter of time before we refer to ‘alternative platforms’ in the same breath as ‘traditional’ ones.

thanks for reading – if you have any comments or questions on the above, or are interested in talking to us, please get in touch.