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Funding for growing businesses – Obtaining and managing private investment
Funding for businesses can come in a range of forms depending on your needs, creditworthiness and projected ability to make repayments.
While many business owners choose to take out commercial business loans to meet their funding needs and growth goals, this is not the only option, particularly if you think that repayments with interest could hinder future progress.
In this case, your attention might turn to private investment.
If you choose to go down this route, it’s important to understand what expectations you may have to meet and the types of funding you may encounter.
The ins and outs of private investment
Investment is generally one of three financing options for SMEs, along with loans and grants.
In a similar way to receiving a grant, you won’t necessarily be expected to repay the investment amount like a loan. It is the investor’s choice to support your business financially and they assume the risk when they come on board.
Instead, you’ll typically agree to give your investor a proportion of your profits for a certain period of time.
This means that, if your business excels, your investor will make a good return on their investment but will make a loss if something doesn’t go according to plan.
Types of investment
Types of investment your business might attract include:
- Angel investing: Investors provide capital for a business start-up, usually in exchange for a portion of the business profits or partial ownership. Angel investors often contribute not just capital but also advice and business connections.
- Venture capital: Venture capital firms offer significant amounts of capital to start-ups and high-growth companies with the potential for high returns. In exchange, they usually require equity and significant influence on company decisions.
- Private equity: Private equity investors provide capital for businesses looking to expand, restructure, or transition ownership. Investments are often in larger, established companies compared to venture capital. This investment is in exchange for shares in the company.
- Crowdfunding: Through online platforms, businesses can raise small amounts of capital from a large number of individuals. This method offers the advantage of not having to give up equity or repay the investment directly, though some platforms enable equity crowdfunding.
- Peer-to-peer lending: Businesses can receive loans directly from individuals without the involvement of a traditional financial institution. This can be faster and more flexible than traditional loans, but interest rates can vary widely.
Preparing to seek out investment
If you decide to go down the investment route, you will likely be expected to demonstrate certain things about your business before an investor is prepared to work with you.
A solid financial plan is usually the most important element in the early stage of investment.
You’ll need to be able to show investors that your business can realistically make a profit and provide some form of return on investment.
Without this, there is little incentive to financially support your business.
To do this, you will need to show:
- Financial projections
- An awareness of your market
- Evidence of good financial management
- A business strategy
- Ambitious but realistic growth goals
You should also ensure that your business is truly ready for growth and can meet an increased demand for your product or service. Without this, growth is likely to fail or stagnate.
Managing investment funds
Once an investor has provided funding to your business, you need to be able to properly allocate and manage these funds.
Some investors will give you free rein to use the money as you see fit in order to grow your business according to your plan, but many will ask that you demonstrate how you have used their funding and may even want some say in how it is applied.
Whichever approach your investors take, you should be prepared to keep and show solid financial records to demonstrate that you are using investment funds appropriately.
You should also ensure that you review any legal agreements made with your investors and meet any requirements detailed there, such as providing regular financial updates.
Ultimately, seeking financial advice is the best way to know that your business is ready to grow through investment and that you can meet the necessary expectations.
To learn more about attracting and managing investment, contact a member of our team today.
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