Nowadays, in theory, all you need to bankroll a start-up or expand your business is a computer with access to the internet.
Gone is the requirement for Mark Zuckerberg wannabes to raise capital for their ventures by enduring Dragons’ Den style pitches, or arranging appointments with tight-fisted bank managers for a business loan.
Except, as ever, life in practice is quite a bit tougher. If you want to raise money for a start-up then you need to expect some hard work – getting your business plan watertight, honing your powers of persuasion, and getting stuck into any contacts that you have.
Facebook was the brainchild of Mark Zuckerberg who sought venture capitalist funding to grow the social media company
Some 657,790 businesses launched in 2016, representing a year-on-year increase of 8.2 per cent and a sizeable hike of 49 per cent from the figure recorded for 2011, according to Government-backed entrepreneurship initiative StartUp Britain.
This means that there are even more start-up firms vying for much needed cash injections to catapult their businesses to new heights.
From crowdfunding to angel investing – what is the best way of getting your small business off the ground?
We review the top six ways in which young firms can raise capital.
Friends, family and contacts
Some start-up bosses skirt the bank and look to family and friends for funding – many of whom may or may not have business acumen.
The main benefits of such approach is obvious. Those nearest and dearest to an entrepreneur are unlikely to demand an extortionate rate of interest and may simply choose to invest in the proposition based on sentiment.
Caleb explains these loan deals tend to be loose in structure and typically allow the recipient to repay the sum once the business has generated reasonable inflows and is able make repayments.
She said: ‘This is probably not the best method to raise incredible amounts of money. Family and friends usually offer small amounts.
‘You have to think about the reality of losing a friend and, perhaps even worse, falling out with a family member if all doesn’t go to plan and you lose their money.’
There is a real possibility of falling out with family and friends if all does not go to plan
Ms Caleb advocates establishing from the outset whether the money being lent entitles the investor to shares in the company or is simply a loan.
Away from friends and family, your contacts can be an invaluable source to tap up for funding and knowledge.
This is particularly the case if you are starting or expanding a business in a field in which you have worked before and know people who are aware of your track record. Approaching them directly and asking them to invest or lend money to you, can pay off, as they may value your expertise and believe you can make your idea work.
Their advice and feedback can also prove to be a major asset in starting or expanding your business.
Business angels can add value by not only investing capital but offering their well-honed business expertise to start-up firms
Angel investors provide financial backing for early stage and start-up businesses in exchange for an ownership stake in the company. The likes of Facebook and Uber broke into the mainstream thanks to this mode of business funding.
If a start-up performs well, both parties would reap the financial rewards; conversely, if the venture goes south, the business angel would not expect their initial investment back.
There’s an additional advantage of using an angel investor. A rule of thumb suggests that around nine out of 10 start-ups fail.
But business angels often go beyond pound and pence investment and lend their well-honed business expertise to younger firms. And it’s this that really matters.
Bill Morrow, founder and chief executive at angel-led investing platform Angels Den said: ‘We see over 100 business plans and applications every day for angel funding and each one asks us for the wrong thing.
‘They all ask for money, whereas in our ten years of experience what they really need is mentorship, business experience, contacts and then the money.
‘Raising capital is part of the process, but we are more interested in ensuring that they are equipped to survive three, four, five years down the line and what will kill almost every business is what they don’t know, they don’t even know.
‘This where the clever money that sophisticated investors bring, comes into its own.’
This method of fund raising also enables start-up business bosses to raise capital without the need for collateral or the expectation of capital repayment and interest.
It all sounds good but there are a few important details that company chiefs should note.
Those who hand over a slice of their start-up are essentially waving goodbye to a chunk of their future earnings.
It is therefore absolutely imperative for founders to weigh up whether the value that an angel can offer justifies the demanded equity stake, or whether it is worth walking away from the deal to pursue other funding options.
Elsa Caleb, small start-up team manager at the Federation Of Small Businesses, said although business angels generally have a higher tolerance to risk than banks when it comes to investing in small business, they generally have higher expectations.
This expectation, compounded by the fact that many business angels have earned their stripes through developing a business from scratch, manifests into a higher performance burden on the start-up in receipt of angel funding, she added.
Around 2,980 businesses are backed by UK private equity and venture capital according to the British Private Equity and Venture Capital Association
Venture capital is a form of investment in early-stage companies that are believed to have high growth potential in exchange for a partial ownership of the company.
It sounds similar to the concept of angel investing but there are some key differences.
Angel investors are high net worth individuals who use their personal finance to fund investments. VC, meanwhile, is typically provided by a collective of rich private investors, or more often specialised financial institutions such as venture capital funds, investment banks and pension funds.
In addition, business angels, who dish out an estimated £1.5billion in start-up firms each year in the UK, generally invest at an earlier stage in a company’s life than a venture capital firm, and offer less money according to the British Private Equity and Venture Capital Association.
Aside from the financial backing, VC can be a source of valuable business guidance and offer practical support, including financial management and human resource management.
However VC is not appropriate funding solution for every young business according to Adam Riccoboni, founder of business consultancy firm Critical Future.
He is no stranger to VC funding himself, having used the funding channel to raise £8million to grow a business consultancy platform Talmix – a business he co-founded with an old school friend.
Drawing from personal experience, Riccoboni argues that business freedoms are eroded the moment funds from a VC enter a start-up’s bank account.
He said: ‘VCs generally want the companies they invest in to be sold within three to four years, but quick business growth can lead to even more problems down the line.
‘They want the business to be sold for an extraordinary amount of money so they are very particular on how the business operates.
‘They take over – you lose control of your business. We essentially became an employee with shares and had to follow and execute a business plan set out by the VC.’
In some cases, a VC’s stake in a start-up could exceed 50 per cent – resulting in the loss of management control.
It should be noted that VC and private equity are not one and the same. Private equity funds invest in more mature firms with the aim of reducing inefficiencies and driving business growth through often increased margins and/or new sources of revenue growth, according to the BPEVC Association.
It estimates that 2,980 businesses are backed by UK private equity and venture capital and employing around 385,000 full-time employees.
Any money pledged to a funding campaign made through an crowdfunding platform which falls short of its target is usually returned to the respective investors
Crowdfunding usually takes place on a website platform where businesses or individuals typically explain their project to attract loans or investment from the public.
This space is evolving but there are four different models at present. These are donation-based crowdfunding; pre-payment or rewards-based crowdfunding; loan based also known as peer-to-peer; and equity investment based.
This mode of fund raising can be particularly useful for business chiefs who are unable to secure finances through other means. If you’ve got a popular product or idea that appeals to a wide audience, you are also likely to be able to raise money more easily this way.
Of course, you will have to publicise your idea though.
The medium is also a good gauge of the wider public’s appetite to a business proposition. Money talks, so an influx of investment is a sign that a business idea could work well, according to Caleb.
She said: ‘Crowdfunding is an excellent, albeit inadvertent, marketing strategy. Businesses that have managed to raise money through crowdfunding essentially have a large number of people backing them.
‘It is in the group of investors’ interest to see the business do well, meaning that they are likely to promote the company to friends and family.’
The first potential drawback of crowdfunding, however, is if you have a complex business idea. A lay-person is unlikely to be able to identify the opportunities behind credible but elaborate business ideas. Also they may not be willing to sift through lengthy research that affirms the credibility of a business plan.
In addition, if a funding campaign is just shy of its target, any finance pledged is usually returned to the respective investors. Failed fund raises could damage the reputation of both the entrepreneur and their business.
What is more, business ideas that float on crowdfunding platforms without intellectual property protection are in danger of being copied.
London home to The Shard (pictured) came third behind Bristol and Edinburgh in the rankings
Loans and grants
The traditional way of securing start-up cash is going to the bank. Bank loans are good – if you can get one.
The British Business Bank estimates banks reject loan applications from some 100,000 small business each year – representing a funding shortfall of £4billion.
Banks will lend – and do lend huge sums every year – but in the post-financial crisis environment they are more risk averse and are therefore less likely to back more esoteric start-up propositions.
Banks can offer a large amount of capital to start-up businesses but applicants would need to jump through a number of hoops to secure funding
It is difficult for small businesses to secure a loan unless they have a substantial track record or hold valuable assets like property, according to Caleb.
Individuals with a low personal credit score are also likely to be denied a business loan from the outset. Many banks will also be unwilling lend if the loan applicant has not injected their own personal funds into the venture.
‘They simply want to be assured that you’ll be able to repay the money they lend. All banks have a different approach to judging this,’ Caleb said.
‘Do not forget that bank’s loans can be called in at anytime so make sure that you have a plan B even if you are successful in getting the loan.
‘The main thing banks look for when lending money is whether your business is able to repay the money they lend. All banks will have slightly different criteria they use to judge this. But there are common things you’ll need to show them to prove you can repay the money.’
Bank loans are usually individually priced and have negotiable terms and conditions. Things like a solid balance sheet and attractive future revenue forecasts are likely to generate a low rate of interest.
There are also a handful of business grants – although they are hard to come by. These include The Prince’s Trust which offers small low interest loans of up to £5,000 for young entrepreneurs between the ages of 18 and 30
‘In the grand scheme of things grants usually represent an incredible small amount of funding that business actually need to grow and prosper. People should use grants as leverage for something else,’ Ms Caleb said.
One of the main positives of going it alone is retaining complete autonomy, but using personal assets to bankroll a new venture is a huge financial gamble
Do it yourself
Those who choose to start up a business without external funding answer to no-one and are therefore free to manage the company as and how they see fit within legal parameters.
Starting a business with minimal capital, also known as bootstrapping, teaches bosses some invaluable business skills including how to make their pound stretch further.
After a disappointing experience with venture capitalists in his earlier career, Riccoboni took a different tack with his latest venture – Critical Future – by going it alone.
‘I did learn a lot from the venture capitalists from my first venture. There were some very strategic people on the board but that is not the only reason for the success of the new business.
‘It helps that we are a consultancy business because we could create the company with very little set up costs. The fact that we managed to get revenue from clients from day one also helped.
‘It did not cost a lot to set up the website. We funded it by bootstrapping. Entrepreneurs can build their website themselves by using templates.
‘I would encourage small start-up to get a good and workable product or service to market and get selling. You can use the proceeds to further grow and develop your proposition.’
It should be noted that entrepreneurs who choose to use their own cash to get their business up and running are taking a financial gamble – especially if the business fails.
Also, without a substantial capital injection, businesses risk growth at a snail’s pace and markets do not wait for anyone. Businesses that fail to quickly build scale are in danger of missing a window of opportunity that could propel them to new heights.