Top tips for funding your business

Do you get confused with having to write a proposal for funding for your business? If so, there are three alternative ways of financing your business that could make your life easier, according to Simon Dixon of Bank To The Future

I like to split the financial world into two periods: BC and AD. I view BC as before around 2007, the time before crowdfunding, and AD as the time after the debt crisis.

For the last couple of decades, Silicon Valley has effectively been paying the bills for any small company to start-up in the UK and negating the need for a proposal for funding. The advent of new technology has meant the cost for a new business has shrunk to just three basics: an internet connection, smartphone and a laptop.

Funding a business: how start-up costs have shrunk to just £1,000

Most people have these already, meaning the cost of funding a business has shrunk to just £1,000. The Government has also introduced extremely attractive incentives for investors in start-ups – such as the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS). These give ordinary income tax payers the opportunity to invest in early-stage businesses, with the Chancellor paying 78% of the bill that you can claim back off your tax.

This will potentially bring a redistribution of wealth from high-earners to SMEs that are looking to find equity finance. For example, if you invest £100,000 in a company, then the real risk to you is about £28,000 that you pay in tax. The Government has therefore effectively de-risked the investment in early-stage businesses.

Crowdfunding: why everyone can be a venture capitalist

Crowdfunding platforms such as mine have taken the same processes that can be used to raise finance for large companies, stripped out all the costs, and made it accessible to small businesses looking to raise relatively small sums of money. This means that everyone can be an angel investor and venture capitalist – and with just a few pounds if they want.

So, we have three simultaneous benefits: the cost of business has never been lower; the cost of finance has been democratised – taking it from institutions to people; and the government is de-risking the investment process.

Three alternative ways to help you fund your business

What’s stopping us? If you are a high-growth company, investors will seek you out. If you are at that early stage and looking to raise less than £1m, crowdfunding is the answer. There are three products you should consider:

1. The first is crowdinvesting. It is effectively a mini-IPO (Initial Public Offering) for small businesses looking to raise between about £150,000 and £500,000. At the moment, there is no heavy regulation in this sector (unlike the  Alternative Investment Market), but the challenge is that this might change.
2. The second is crowdlending (also known as peer-to-peer lending) where you effectively become the bank and lend money to the start-up. You put your money into a crowdlending platform where the risk is diversified and you can get about an 8% return. Effectively, you bid on loans to credit-worthy SMEs that are looking for finance.
3. The final route is crowdfinance. An SME uploads a ‘pitch’ and you ask your followers to invest in return for a non-financial benefit.

Alternative finance has been set up to serve businesses and it is a very interesting space to watch. So far as a sector we have only raised about £1.8bn using these new platforms, but that is just the start.

If you’re fed up with writing a proposal for funding and want to learn more about alternative ways to fund your business, visit Simon’s Bank To The Future website

Simon Dixon is the co-founder & CEO of Bnk To The Future.