BUT your expectations of earning an income however needs to be realistic as the adaption to lower income and resultant strain can usually be fatal for start ups or at least a major headache especially if you were used to drawing a wage….
The decision to leave a job and set up your own business is more a function of WHY you are doing it? What’s your purpose and goal for the business and your new lifestyle….the need for funding is more about losing a stable income stream not the capital needed to start a company etc . Understanding this is the KEY consideration of taken the leap…….
Let’s talk about Finance…how much?
Well it depends of course on the business. It starts with assessing whether you can develop your business without significant upfront investment and risk. Can you generate sales and cashflow to fund further investment in capital or stock? Do you need to invest in capital items i.e. a website or app, a building, R&D, patents, legal costs, design, stock etc. There are potentially many goals you can reach even whilst still retaining paid income but I would strongly recommend you have a firm date you focus 100% on your NEWCO as a side hustle rarely succeeds if you don’t give it your full attention. It often leads to frustration, becoming overwhelmed and not achieving in both your day job and your start up. Even worse you can end up burning out before you even launch…..
You can’t expect to grow a business where people pay you for something doing it part time. If it’s not worth your time it won’t be worth other people’s money. If you don’t believe in it then nobody else will.
Types of funding
In an ideal world you won’t need external financing. You have saved enough money or had it gifted from a relative to get going and even built in a small allowance for yourself or might remortage. Be honest about your living costs, discuss with your partner, if you have one, and consult them at all stages of your decision making before and after you commence. One of the largest disablers to being successful is the lack of alignment with your family on the impact it will have on all of you financially and emotionally. The late nights, never ending deadlines, constant customer needs etc. DON’T let your family and personal life fail for the sake of your business as this completely defeats the purpose of it in the first place.
If you do need funding?
First work out from your financial model how much you need funding and when. Raising money takes time and raising equity takes longer than raising debt as it typically involves the new shareholders taking on more risk whilst you give up part of your company so debt should always be considered as a first option so you can keep control. Having said that you should seriously consider whether an investment partner is something you might benefit from, most will want a say in how the business is developed, but some may add real value to your business or even be co – founders. The topic of going into business with friends and family is a complex one – if you do, be prepared for lots of difficult moments. There are very few co- equity situations that have survived, I would argue most fail or one partner exits due to differences in strategic directions, changing life choices etc. Steve Jobs got fired from his own company for example, so be prepared and think long and hard about ownership structure, or stick to royalty payments or profit shares and debt lending so you keep control, or even silent investment partners (crowdfunding for example). Most shareholders will seek voting rights where debt providers don’t, although in distressed situations they do of course take first priority over the shareholders.
Grants
First thing to do is check if grants are available from the government or the local council. You can also get grants for certain types of business from charities and non – profits particularly in the service sector, helping people at risk or disadvantaged situations or creating employment opportunities. If your business is a charity or non- profit, encourages health and wellbeing or has elements of social value then check the National Lottery, The Sports Council, the London Marathon Trust and large sport associations like the FA, the ECB or the RFU if it’s sport specific. Grants are not repayable so it’s worth doing some research especially if your business has social value.
Debt (Lending)
Next option would be unsecured debt. This means you don’t offer up any assets (your home) but the company is supported by a Director Personal Guarantee up to levels around £50,000k. You are still on the hook if the business fails to make the repayments as you would be with a personal loan. It’s pretty much the same but the banks will still require a business plan and financial model / P&L. Banks will usually help with the financial forecasts.
If you need larger amounts then Secured Debt is where a lender requires a personal guarantee and in sums over £50,000 security over a personal property. This would typically be how a high street lender/bank would lend. Whilst they need a profit and loss to calculate the affordability of the repayments ultimately they would seek to take security over your property if you own one. On top of expecting you to also invest in the business. The % of equity they expect you to invest can range from 10 to 50%. Some lenders won’t lend without property behind the loan but where it’s there you should be able to borrow at around 4 to 6% (as at October 2020 with base rates at 0.25%).
Typically they calculate affordability based on the annual debt repayments being around half of the Annual EBITDA, which is basically your cashflow profits (Turnover less Fixed and Variable Costs). Obviously having your property behind this helps a lot so it’s usually a good way to borrow money in the company but you are taking on personal risk.
Once the business is up and running then you can usually borrow money off the company cashflows but this doesn’t help a start up. You should eventually look to move your personal guarantees onto the Limited Company, where the Company remains responsible for the assets and liabilities. There are many lenders who will lend to companies making existing profits and using things like invoice factoring (where you can lend on recent invoice values etc).
Asset backed financing
Some lenders will lend to acquire plant and machinery, vehicles, equipment and property which has a realisable market value should the business fold. Usually rates are higher than secured lending on personal property.
Mezzanine Finance
Typically more sophisticated banks and funds who will lend debt at around 10 to 15% Interest but also require an option to invest equity at a set price of entry. Effectively enabling them to buy in when they’ve created value from the loan. Most ‘mezz’ funds are higher risk so they are probably not for smaller start ups and people with no track record and they require larger sums i.e. £10m + investments for example minimum. They will require the owners to put ‘skin in the game’ and management quality will be vital so if you don’t have a few hundred thousands pounds in net assets then this many be complex.
Equity (Investment in shares of the company)
As discussed equity fund raising should be seen as a secondary option to entrepreneurs but there are very clear advantages to taking on new shareholders and in some cases where the business model is deemed too risky or you don’t have a property or your own equity to invest, or you need large amounts of capital then equity might be your only option. Most Equity Investors require you to have ‘skin in the game’ and these levels vary on a case by case basis. I would assume between 20 to 40 % should be provided by the founders but it can be lower than 10%, or even 5% for larger transactions where management are paid more equity on success milestones
Crowdfunding
Platforms like https://www.seedrs.com/ or https://www.crowdfunder.co.uk/ are worth checking out. You launch a fundraising on the platform and members of the general public invest in you. It can take around 6 months or longer to get the money in the bank but it has proven very popular route with start – ups, you can determine how much you value your company at and can raise as much as you wish. It tends to attract higher risk start ups where there is a good idea but perhaps doesn’t fit the scale for larger equity funds or pension funds. The investments tend to be quite illiquid so investors are committing for a long period before they can see their investment monetised, typically. However, if you have a good idea, however leftfield, it’s worth reviewing crowdfunding options.
Venture Capital / Private Equity / High Net Worth / Angel Investors
Whilst not identical, these investors will all be looking for meaningful equity in your company and some say in how’s it run. The advantages of using them is that they can add material value to your business in terms of strategy, networks and execution and material further investment as and if you grow. When you consider funding think long term not just getting you started. Think about if you need acquisition funding and where debt can play a role. Many equity investors can bring debt with them so they can add value there in their own relationships. The amount invested can vary from £100 to £100’s of Millions and you can find these investors on sites such as http://www.decksender.com where you get to present you business ideas to individuals and funds looking to invest. There are a number of business angel websites (usually high net worth individuals) and advisors who can introduce you to potential equity investors and specialist funds. The Chamber of Commerce are very helpful in this regard and your accountant.
In Summary
I hope this article has proven useful. It’s not specific advice so please ensure you do your own due diligence before signing up any finance. If you need further assistance on I’m happy to help with –
Good Luck !
Ed
ed@atthebox.co.uk
Ed is founder of AT THE BOX and moved back to the UK in Summer 2017…
