If you are seeking funding for your business, you are faced with two main options. You can borrow money and pay it back over time (a business loan) or you can seek private equity investment – which essentially involves selling a portion of your business in exchange for capital.
As a small business, your best source of this kind of funding will be a business angel.
What are business angels?
A business angel is normally a high-net-worth individual who invests in private businesses. They are also known as angel investors or seed investors.
Business angels normally invest up to £1 million into businesses in their early stages.
For investment above this amount, businesses may turn to venture capital schemes or firms.
Angel investors are typically highly sought-after, not just for their money but for the experience, expertise and potential contacts they may bring.
This means it may not be easy or quick to bring a business angel on board.
Here are some of the challenges to consider.
- You must demonstrate that you have made a significant financial investment in your business in order to convince a business angel to do likewise.
- You must be able to prove your motivation and ambition. Having a strong business model and business plan is crucial.
- You must know your figures inside out. Be ready to answer any questions the angel investor has about your cash flow and projections for the years ahead. Your accountant is invaluable here.
What about a business loan instead?
If you want to raise capital but aren’t sure about reducing your share of ownership, your other main alternative is a business loan.
Various different types of lender may offer you a business loan, including
- High street banks
- Challenger banks
- Independent lenders
- Smaller specialist lenders
- Peer-to-peer (P2P) lending sites
The right choice for you may depend on your circumstances. For example, you may be able to obtain a better rate through a high-street bank, but the lending criteria will be tougher.
Research each option to decide which is most suitable for you.
Some loans will be ‘secured’, meaning you borrow against one or more business assets (e.g. your property) and could lose some or all of this asset if you can’t repay the loan.
It’s easier to take out an secured loan, though you may be able to take out an unsecured loan if the lender considers you a safe prospect.
As with securing investment from a business angel, it’s important to have a solid business plan and fully understand your business finances before applying.
Comparing private equity with business loans
In the table below you can see the main advantages and disadvantages of these two forms of business funding.
Private equity (business angels)
Cash injection with no loan to repay
Losing a share of your business
You dont have to give away a share of your business
You will have to repay your loan, which could slow business growth
Skills and expertise from an established businessperson
Many options such as peer-to-peer lending not just banks
Your decision on how to source your funding will have an impact on the long-term future of your business, so consider this choice carefully in light of your business plan.
This should help you work out which option fits in best with your long-term strategy.