If your business needs an injection of cash, there’s a huge range of possibilities. Business loans are still the most common form of financing in the UK for established enterprises, but crowdfunding and angel investors are increasingly viable options, for both new and existing businesses. But how can you know which route is right for you? Let’s look at each option in detail to find out:
Crowdfunding
What is it?
Crowdfunding is an umbrella term for the type of fundraising that involves receiving funds from any number of members of the public. Sometimes investing individuals are offered benefits (such as products, discounts, membership, etc.) in return for their money, and sometimes they’re offered a stake in the business. The latter is known as equity crowdfunding.
One of the huge benefits of crowdfunding is the flexibility it offers. Almost any amount of money is theoretically available, for almost any purpose, and you as a business owner can decide what you’re comfortable offering in return. Anyone can choose to invest in your business. Large sums can be generated quickly, especially for innovative products, among a pre-existing loyal customer base, or for ideas with strong growth potential. But it isn’t all roses: a successful crowdfunding campaign needs a solid pitch, rigorous administration, relationship management with investors, and you may have to give up a portion of ownership of the business.
Crowdfunding Pros
- No loan repayments
- Access to potentially large sums of money
- Funds can be used for any business purpose (as long as it’s in line with what investors have been told the money will be used for)
- Allows a wide range of people to support your business, not just traditional investors
- Raises brand awareness
- Appropriate at any stage in a business’s lifecycle
Crowdfunding Cons
- You may have to relinquish outright ownership of the business
- Investors may influence decision-making in the future
- Investors may require a share of future profits
- Can be time-consuming to set-up and administrate (although use of a dedicated crowdfunding platform can help ameliorate this, for a fee)
Angel Investors
What are they?
Angel investors are a lot like equity crowdfunders, but there are fewer of them and they invest larger sums of money. They’re sometimes formed into groups or syndicates of high net worth individuals, and they tend to focus on early-stage businesses and start-ups. The average angel investor invests £25,000 in the UK, but the range is usually anything between £10,000 and £50,000 per investor.
As with equity crowdfunding, angel investors will expect a share of the business (and/or profits) in return for their cash. However, as angel investors are typically business professionals themselves, and keen to maximise their potential returns, they may offer their own expertise to help guide the business. Their involvement can lend credibility to a new business, and their experience may make the success of your venture more likely.
Angel Investor Pros
- Can provide access to valuable expertise, industry experience and connections
- Flexible investment terms
- No loan repayments
- Boosts business credibility
Angel Investor Cons
- Only appropriate for early-stage businesses
- Requires relinquishing some control of the business
- Limited funding amounts (unless you are able to attract the attention of a syndicate)
- Angel investors expect quick profits, which can put pressure on business owners
- Stiff competition to attract angel investors
Business Loans
What are they?
The majority of businesses in the UK still turn to traditional business loans when they need cash, and this may be because this form of business financing allows you as the business owner to retain full control of your enterprise. And business loans come in a huge range, to cater to almost any need. There are term loans, equipment loans, start-up loans, secured loans, unsecured loans, cash advances, revolving credit facilities, bad credit loans… The options are plentiful, and mean that you can borrow anything from £500 to £1 million or more.
However, every loan has to be repaid in full, including interest and fees, and this can put a strain on a business’s cash flow. Failure to make loan repayments will have an impact on a business’s credit, and may imperil the business’s ability to access financial products in the future. And while some loans can be obtained very quickly (within a day or two), the larger the loan is, the harder it will be to qualify for and acquire – meaning it is tougher for new businesses, small businesses or those with unconventional business models to access them.
Business Loans Pros
- Retain full ownership and control of your business and future profits
- Accessible to businesses of any size and at any stage in their lifecycle
- Funds can be used for any legitimate business expense
- Can be obtained quickly
Business Loans Cons
- Loan funds must be repaid (regardless of business performance)
- Repayments may adversely affect cash flow, and increase running costs of the business (thereby increasing sales needed to break even)
- Borrowing amount will be determined by loan type, lender, and the borrowing business’s financial situation
- Business’s credit is at risk if loan repayments are missed
- Business assets may be at risk if used as collateral on a secured loan and loan is defaulted on
Each type of business financing has its own pros and cons; there is no one-size-fits-all solution, so it’s incumbent on each business owner to understand what will work best for them. Many business owners use a combination of financing types to achieve their goals.
To find out more about different types of business financing, read our blog; or contact us to access flexible and affordable financing right away.