You’ve just formed your new business and you need to raise money to help you scale up. But where do you look for potential investment, and what options are available to you as a limited company owner?
In this article, we explore some of the most common ways that limited companies can raise money. We cover finding investors through business networking, the issuance of shares, crowdfunding, and taking out a traditional bank loan, to help you find the right way for you to raise money for your small business. Let’s get started.
Find investors through networking
The first step when raising money for your small business is to find new investors. A great place to start is at networking events. As a new business owner, networking is an essential gateway that’ll connect you with other like-minded leaders and potential business partners.
Business networking can either be face-to-face or online. There are many local and national events in the UK, which websites like Eventbrite and the Federation of Small Business can help you find and sign up for.
But networking doesn’t always have to be a dedicated event. Reaching out to people online is also a form of effective networking, that can help you find the right people to raise money for your company.
Before an event or a conversation, remember to have your pitch ready. You are going in intending to raise money for your business, so you should be prepared to explain what your company is and what you do, what your USPs are, and why someone should invest in you.
Raise money by issuing new shares
Another way to raise money for your small business is by issuing new shares. Shares can be issued either at incorporation (wherein the initial shareholders, known as “subscribers”, are listed on the incorporation application and the company’s memorandum) or after the company has been incorporated (wherein new shares are issued and allotted to the new shareholders).
Limited companies have the option to issue new shares at any time to new or existing investors. It’s important to distinguish that only public limited companies are permitted to offer the shares to the general public (for example, via a stock exchange), which is not something private companies can do.
Pros and cons of issuing new shares
In addition to all the benefits that come with bringing on an investor, an issue of shares has the benefit of being one of the most well-known means of raising money. This familiarity alone makes it an attractive proposition for all parties.
Further, issuing new shares has the added benefit of improving the company’s balance sheet by increasing its net assets. This is helpful for a number of reasons, including as a means of attracting further investors or dealing with creditors in the future.
Additionally, there are several tax-advantaged schemes that UK companies can use to help investors efficiently invest their money in their company. These include the Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS).
Both schemes are government initiatives that are designed to help small businesses raise money. With EIS, limited companies can raise up to £5 million a year or up to £12 million in the company’s lifetime. With SEIS, you can receive a maximum of £250,000 when you’re starting to trade.
That’s not to say there are no potential drawbacks to issuing new shares.
Firstly, any issuance is likely to dilute your own ownership of the company. This could mean reducing the amount of dividends you receive (if and when the company declares one), but it also leads to the second major drawback: a loss of control.
When the shares are issued to investors, they receive certain rights including, amongst other things, voting rights on shareholder resolutions. If the investor(s) receive enough voting rights vis-à-vis your own, you may end up losing ultimate decision-making and control of your company.
Finally, with a greater number of shares and a greater number of shareholders to deal with, you may find that the costs and time spent on company administration also go up.
Raise money through crowdfunding
Crowdfunding is a fundraising campaign used by many small businesses to raise money. It allows you to raise small amounts of capital from multiple people to reach a total investment goal.
Crowdfunding aims to get small companies off the ground with financial support from anyone willing to donate to the cause. This can be professional investors, friends and family, or strangers.
There are a few different types of crowdfunding options – the first is loan-based. This is where investors lend money to business owners in exchange for a pre-agreed interest rate.
Another is equity-based crowdfunding. This means that investors get a stake in the business through shares, in return for their financial support. There may be other rewards, too, depending on the level of investment provided.
You can also run a reward or donation-based campaign. Reward-based crowdfunding offers investors a specific reward (like discounts on your products or services) once you’ve successfully launched your business. With donation-based campaigns, you receive a donation to kick-start your new company without providing anything in return.
Pros and cons
One of the main advantages of crowdfunding is that it removes the middleman (banks), meaning you can access funds quicker than through traditional loans. Also, unlike borrowing from a bank, crowdfunding allows you to receive funding from a pool of investors and raise the exact amount you need, as opposed to the amount you qualify for.
Another advantage is that a crowdfunding page is simple to set up, so you can quickly raise the capital you need, with the flexibility of choosing the incentives and rewards that you offer to potential investors.
On the other hand, the project can be time-consuming to create and manage. Also, you may be unsuccessful in raising your total investment goal. So, you’ll need to evaluate the implications of your crowdfunding campaign failing and source other means of investment.
How to start a crowdfunding page
Before creating your project, you need to button down the specifics. Firstly, determine your total fundraising target.
Next, what type of campaign do you want to run? In other words, what type of rewards (if any) will you provide to investors? If you choose an equity-based campaign, think about how many shares you can give away and how it will impact your budget and business structure.
When you’re ready to create your fundraising page, research suitable platforms. Some of the most popular crowdfunding sites in the UK are Seedrs, Seed Legals, and gofundme.
Finally, create your campaign. Your page should be detailed, personal, and engaging, telling potential investors a story about who you are as a business and an individual, and why they should invest in you.
To make your page more engaging, consider both written text and images/videos. This could be a brand video, designs, team photos – anything that’ll help bring your project to life. Don’t forget to make your fundraising goal and rewards clear to potential investors.
Take out a traditional loan
If you prefer a traditional loan, there are 3 main options: personal, business, and Start Up Loans. A personal loan is normally unsecured, meaning there’s no need to provide collateral, and it is based on your personal as opposed to business credit score. Some lenders allow personal loans to be used for business purposes, but this isn’t always the case, so you could double-check this before applying.
A business loan, on the other hand, is used specifically for business purposes, such as finding an office space or funding new equipment. You can normally borrow up to £100,000 or more depending on the lender, and they are typically secured, meaning you’ll have to provide collateral in the event of a default.
Finally, a Start Up Loan is a government-backed loan. You could borrow up to £25,000 (per business owner) with a fixed annual interest rate charge of 6% and repayment periods of 1-5 years. Like personal loans, Start Up Loans are unsecured.
As well as financing, a Start Up Loan also gives you free support and guidance with writing a business plan, as well as up to 12 months’ free mentoring.
Pros and cons
Unlike crowdfunding, traditional loans give you immediate access to the investment your business needs once approved. There are also several options to choose from depending on how much you want to borrow, how long you need to repay the loan, and whether you want secured or unsecured financing.
In addition to the financial investment, some lenders also offer extra business support and tools to help you grow your start-up, which you may not have access to with other investment types.
But there are some potential disadvantages to consider. For instance, the application process for a traditional loan can be lengthy, and some lenders may have strict eligibility criteria.
They all require a credit check, so you could struggle to secure the investment you need if your personal or business credit score is too low. Also, if you take out a secured loan that requires collateral and you default on your payments, you could lose your assets.
Apply for a traditional loan
To apply for a personal or business loan, you’ll need to compare the available products. Sites like Compare the Market are a great way to check your eligibility and explore the personal loans available to you.
For small business loans, Finder offers a comprehensive comparison of the top offers. The applicant must be a director or business partner and be authorised to act on its behalf. Your company must also be incorporated at the point of application, and you’ll need your company number, the latest filed accounts, and an existing business bank account.
To apply for a government-backed Start Up Loan, you can do this through various websites like British Business Bank or Tide. You need to be a UK resident, be 18 or over, and have an incorporated business that has been trading for less than 36 months.
Other ways to find investment
There are many other ways that you can find an investor for your small business. Here are a few other options to consider:
- Friends and family: If you’re in a position to do so, you could ask a friend or relative to invest in your business. This can be in return for a reward or simply a donation.
- Social media: Channels like LinkedIn are specifically built for business connections that could help you find the investment your business needs. You can use it to get in touch with investors directly or find networking events.
- Government grants: There are many different grants available to businesses all over the UK. Whether you’re not yet trading, or are an early-stage or established company, the government provides several financing options to support your business.
For UK grants, visit the gov.uk website, for Welsh grants, visit the Business Grants website, and for Scottish grants, visit the Funding Opportunities website.
Summary
Raising money for your small business can be a challenging part of being an entrepreneur. There are many things you can do, such as connect with new investors at networking events, issue new shares in your company, launch a crowdfunding campaign, or apply for a business loan.
Methods like crowdfunding and the allotment of shares are more flexible, but bank loans can be a more predictable option, and can provide you with essential funding more quickly.
Alternatively, you can ask friends and family for financial support, reach out to potential investors on social media, or apply for government grants. All of these options are available to private limited companies, helping them raise essential funding to grow their businesses.
If you have any questions about this article, or want to know more about finding investors for your business, please leave a comment below or get in touch with our team.
