Secure equity investment: six top tips

In this guide:

  • What is equity finance and is it right for your business?

    Work out whether equity finance can provide the finance you want for your business.

    Equity finance is capital invested in a business in return for a share of ownership or an element of control of the business.

    Unlike lenders, equity finance investors don't have the legal right to charge interest or to be repaid by a particular date. Instead they expect to make a gain on capital depending on the growth and profitability of the business.

    Because equity investors share the risks your business faces, equity finance is often referred to as risk capital.

    Is equity finance right for your business?

    Different forms of equity finance suit different business situations.

    It is likely to be most suitable where:

    • the nature of a project does not suit bank loans or other forms of debt finance
    • the business will not have enough cash to pay loan interest because it is needed for core activities or funding growth

    Questions to ask yourself include:

    • Are you prepared to give up a share in your business and some control? Investors expect to monitor progress and many seek involvement in significant decisions.
    • Are you and your key people confident in the business' product/service? Does it have a unique selling point that singles it out?
    • Do you have the drive to grow the business?
    • What industry experience and knowledge does your management team have? Is there a variety of skills?

    Due the risk to their funds, investors expect a higher potential return than for safer, more secure investments.

    After considering the above, seek advice from a professional, eg your accountant, business adviser or local enterprise agency.

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  • Six sources of equity finance

    Outline of the various sources of equity finance available to businesses.

    There are various sources of equity finance, including:

    1. Business angels

    Business angels (BAs) are wealthy individuals who invest in high growth businesses in return for a share in the business. Some BAs invest on their own or as part of a network. BAs are often experienced entrepreneurs and in addition to money, they bring their own skills, knowledge and contacts to the company.  See business angels.

    2. Venture capital

    Venture capital is also known as private equity finance. Venture capitalists (VCs) look to invest larger sums of money than BAs in return for equity.

    Venture capital is most often used for high-growth businesses destined for sale or flotation on the stock market. See venture capital.

    3. Crowdfunding

    Crowdfunding is where a number of people each invest, lend or contribute small amounts of money to your business or idea. This money is combined to help you reach your funding goal. Each individual that backs your idea will usually receive rewards or financial gain in return. See crowdfunding.

    4. Enterprise Investment Scheme (EIS)

    Some limited companies can raise funds under the EIS. The scheme applies to small companies carrying on a qualifying trade.

    There are potential tax advantages for individuals who invest in such companies, such as:

    • the buyer of the shares gets income tax relief on the cost of the shares
    • Capital Gains Tax (CGT) on the sale of other assets can be deferred if the gain is reinvested into EIS shares

    Certain conditions must be met for a company to be a qualifying company and for an investor to be eligible for tax relief - see HM Revenue & Customs (HMRC) EIS guidance.

    5. Alternative Platform Finance Scheme

    If your small business is struggling to access bank finance, there is now a new government scheme in which the UK's biggest banks will pass on details of any businesses they have rejected to three alternative finance providers. These are:

    6. The stock market

    Joining a public market or stock market is another route through which equity finance can be raised. A stock market listing can help companies access capital for growth and raise finance for further development - see London stock exchange: main market.

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  • Equity finance: the equity gap

    What the equity gap is, how you could avoid it, and guidance on Enterprise Capital Funds.

    The equity gap is a term used to explain the gap a company experiences in funding as it moves up the ladder of different finance sources.

    For example, some businesses require much greater funding than that which can be provided by business angels, but do not need the levels of funding venture capitalists would consider. The gap between these two finance situations is known as the equity gap.

    Businesses in this situation may wish to approach private equity firms for help. These are organisations that invest and manage investments and they tend to focus on management buy-outs and buy-ins.

    The government provides a multi-million pound equity finance scheme to close the equity gap by providing Enterprise Capital Funds (ECFs).

    The ECF programme helps those looking to operate in the UK market to raise venture capital funds specifically targeting early-stage small businesses believed to have long-term growth potential - see British Business Bank information on ECFs.

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  • Advantages and disadvantages of equity finance

    Discover the benefits and drawbacks of the use of equity finance or share capital in your business.

    Equity finance, the process of raising capital through the sale of shares in a business, can sometimes be more appropriate than other sources of finance, eg bank loans - but it can place different demands on you and your business.

    Advantages of equity finance

    Raising money for your business through equity finance can have many benefits, including:

    • The funding is committed to your business and your intended projects. Investors only realise their investment if the business is doing well, eg through stock market flotation or a sale to new investors.
    • You will not have to keep up with costs of servicing bank loans or debt finance, allowing you to use the capital for business activities.
    • Outside investors expect the business to deliver value, helping you explore and execute growth ideas.
    • Some business angels and venture capitalists can bring valuable skills, contacts and experience to your business. They can also assist with strategy and key decision making.
    • Like you, investors have a vested interest in the business' success, ie its growth, profitability and increase in value.
    • Investors are often prepared to provide follow-up funding as the business grows.

    Disadvantages of equity finance

    However, there are drawbacks of equity finance too. It's worth considering that:

    • Raising equity finance is demanding, costly and time consuming, and may take management focus away from the core business activities.
    • Potential investors will seek comprehensive background information on you and your business. They will look carefully at past results and forecasts and will probe the management team. However, many businesses find this process useful, regardless of whether or not any fundraising is successful.
    • Depending on the investor, you will lose a certain amount of your power to make management decisions.
    • You will have to invest management time to provide regular information for the investor to monitor.
    • At first you will have a smaller share in the business - both as a percentage and in absolute monetary terms. However, your reduced share may become worth a lot more in absolute monetary terms if the investment leads to your business becoming more successful.
    • There can be legal and regulatory issues to comply with when raising finance, eg when promoting investments.

    For further information on the different ways to raise money for your business see business financing options: an overview.

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  • Alternatives to equity finance

    Loans and government support are possible alternatives to equity finance.

    Equity finance may not suit your business. For example, you may not feel happy about losing a degree of control, or the intended project may be too small to be an attractive investment opportunity.

    Consider the following alternatives:

    • Loans - there are many options available, from commercial mortgages secured against your business assets to short-term borrowing for periods of between three and five years.
    • Overdrafts - overdrafts can be expensive but are a flexible form of borrowing. They're not especially suitable for long-term finance as they are repayable on demand. 
    • Loans from family and friends - these can be a sound method of raising finance, but beware of potential damage to relationships if the money isn't repaid on time. 
    • Additional funds - from you or your fellow partners/directors.
    • Government support - there are government support schemes that may help your business as well as private sector initiatives. Search our business support finder for grants, loans, expertise and advice for which your business may be eligible.
    • Joint ventures - these can take many different forms. The term normally applies to the co-operation of two or more individuals or businesses in a specific enterprise rather than in a continuing relationship. 
    • Credit cards - these are a quick way of raising finance and a flexible form of borrowing. However, unless you can manage your cards very carefully to avoid paying interest and other fees, they are not suitable for long-term finance. 

    Mezzanine finance

    Mezzanine funding combines elements of debt and equity finance and can provide access to bank funding that the business may not have otherwise been able to obtain. Under mezzanine funding a provider charges interest on the debt and also takes a share of profits when a company grows.

    Mezzanine arrangements do not involve issuing shares to the lender and do not affect the value of the company's shares. Debts are usually repaid in a single payment and can be expensive, as the one-off repayment will involve a large sum of money which would affect businesses that have failed to fulfil their growth strategies.

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  • Secure equity investment: six top tips

    Top tips on securing equity investment for your business.

    Equity finance is a way of raising money from external investors in return for a share of your business.  There are two main providers of equity finance for private businesses - venture capitalists and business angels.

    If you have a business with high-growth potential, but you are finding it difficult to obtain bank finance then equity finance may be an option for you - follow these tips:

    1. Target the right equity investor for your business: Approach investors who are seeking to invest in a business that is at your stage of development. Research potential investors that are interested in your sector and want to invest the amount of finance that you require.

    2. Prepare a realistic business plan: Provide details of how you are going to develop your business, when you are going to do it, who will be involved and how you will manage the finances. Demonstrate that you're fully aware of the marketplace that you're operating in and show financial projections to support what you have said.

    3. Value your business accurately: Potential investors will need to know what your business is worth before they consider investing in it. Calculate the value of your business' assets, complete a market comparison with similar businesses and analyse your potential cashflow to provide an accurate value of your business.

    4. Prepare to pitch: Deliver an informative, relevant and engaging presentation. Anticipate the questions and concerns that investors may have and show the benefits of their involvement in your business. Investors will be interested in your personality too, so be enthusiastic and passionate about your business and its potential, without being unrealistic about its prospects.

    5. Communicate effectively and honestly: Communicate clearly about what your business is, what it is trying to achieve, how much money is needed to make it a reality, and what you will deliver and when. Answer all questions that are directed at you and be prepared for probing questions.

    6. Negotiate investment terms: If an investor is interested in collaborating with you, you can start negotiating key issues including respective responsibilities, growth targets, the investor's exit strategy and service contracts. You should also specify how the investment relationship will be managed and what involvement they'll have in the company.

    For further advice see secure equity investment.

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Grants and government support

Introduction

Shares and equity finance

Introduction

Borrowing finance for your business

Introduction

What is bankruptcy?

In this guide:

  • What is bankruptcy?

    Overview of what bankruptcy means and who can become bankrupt

    Bankruptcy is one way of dealing with debts you cannot pay.

    If you are declared bankrupt:

    • the majority of your debts will be cancelled (up to the date of bankruptcy)
    • your assets may be shared among your creditors
    • you will have certain restrictions placed on you
    • your name will be added to a bankruptcy register and published in the newspaper
    • your bankruptcy will usually last 12 months

    Anyone can become bankrupt including:

    • individuals trading as sole traders
    • individual members of a partnership

    Only individuals can become bankrupt. There are different procedures for limited liability partnerships and companies.

    Bankruptcy advice

    If you are facing bankruptcy you should seek advice from a reputable source, including:

    You should be wary of unsolicited approaches through the post or by telephone.

    For more information, see get advice about bankruptcy.

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  • Declaring bankruptcy

    How to declare bankruptcy in Northern Ireland and downloadable bankruptcy forms from the Insolvency Service

    In Northern Ireland you can only be declared bankrupt by the High Court in Belfast.

    After you have presented the High Court with a bankruptcy petition, and the Court decides that bankruptcy is appropriate, you will be declared bankrupt using a bankruptcy order.

    Bankruptcy petition

    The bankruptcy petition is usually presented either by:

    • yourself (as a debtor's petition); or
    • a creditor who is owed an unsecured debt of at least £5,000 (as a creditor's petition)

    Bankruptcy forms

    To petition for your own bankruptcy you need two forms, Form 6.30 (debtor's petition) and Form 6.31 (statement of affairs) - both are available to download from the Insolvency Service website.

    Bankruptcy orders

    A bankruptcy order can still be made even if you refuse to acknowledge it. You should therefore co-operate fully once the bankruptcy proceedings have begun.

    You do not have to be present at the court when your bankruptcy order is made.

    If you live or have lived in Northern Ireland over the past 3 years, a bankruptcy order can be issued against you.

    Bankruptcy notice

    Once the bankruptcy order has been made a bankruptcy notice will be placed in the Belfast Gazette (an official publication) and in the Belfast Telegraph.

    Written notice will also be given to a number of other organisations.

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  • The bankruptcy process

    Duties of a bankrupt individual and an overview of restrictions that are placed on a person who is declared bankrupt

    When a bankruptcy order has been made against you the Official Receiver for Northern Ireland will be appointed to deal with your bankruptcy. The Official Receiver is a civil servant in the Department for the Economy (DfE) and is an officer of the Court. They will also act as trustee of your estate unless an insolvency practitioner has been appointed.

    The Official Receiver will look into your financial affairs before and during your bankruptcy. Details may be reported to the Court and to your creditors. They are also required to report any dishonest or criminal behaviour.

    Trustee requests

    You must comply with any request made by the trustee which may include:

    • attending an interview
    • completion of a questionnaire
    • providing a full list of your assets and details of what you owe and to whom
    • handing over your assets along with all your books, records, bank statements etc
    • give details of assets and/or any increases in income

    Bankruptcy restrictions

    Some restrictions will also be placed on you. You must not:

    • use bank accounts, debit or credit cards connected to your bankruptcy
    • obtain credit of £500 or more without first disclosing that you are bankrupt
    • make payments directly to your creditors

    For more information see bankruptcy restrictions.

    You may also have to go to Court and explain why you are in debt. If you do not co-operate, you could be arrested.

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  • Payments to creditors during bankruptcy

    During bankruptcy there is a non-payment rule to creditors, with a few exceptions including student loans.

    If you are made bankrupt, you must not make payments directly to creditors.

    Creditors to whom you owe money when you are made bankrupt should make a claim to the trustee of your bankruptcy estate. The trustee is either the Official Receiver or an insolvency practitioner.

    Non-payment rule

    Creditors should not ask you directly for payment. If you receive any requests for payment you should pass them immediately to your trustee to deal with and tell the creditor that you are bankrupt.

    Exceptions to non-payment rule

    There are some exceptions to the non-payment rule. The main ones are payments to:

    • secured creditors, such as mortgage creditors
    • non-provable debts, such as Court fines or child support
    • benefit overpayments
    • student loans

    Debts incurred after bankruptcy

    Any debts you incur after you have been made bankrupt must be paid. You must also pay any continuing commitments such as rent to a landlord if you rent your home.

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  • How bankruptcy affects your business

    Bankruptcy can affect your business, including taxes, registrations and employees

    If you are self-employed when you are made bankrupt your business may be closed down and your employees dismissed.

    If you are a director in a company, you cannot continue to act in this capacity without permission from the High Court and you will need to resign your position. Find further information on how to tell Companies House about changes to your limited company.

    Any business assets will be claimed by the trustee unless they are exempt - see how bankruptcy affects your assets and bank account.

    Employees of a bankrupt

    Your employees may be able to make a claim to the National Insurance Fund for any of the following payments:

    • outstanding wages
    • holiday pay
    • payment in lieu of notice
    • redundancy payments

    Beginning trading again

    There is nothing to prevent a bankrupt from being self-employed. 

    You can start trading again but there are a number of restrictions you must comply with - see bankruptcy restrictions.

    Tax obligations

    You must give the trustee all your accounting records. You will also be responsible for submitting any tax and VAT returns.

    Registrations and licences

    Any registration, licence or permission you hold in connection with your business may be affected by your bankruptcy. You should:

    • notify the person or organisation who issued the registration or authority
    • inform the trustee of any registration or authority you hold

    If any of these items have a value it may belong to the trustee.

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  • How bankruptcy affects your home

    If you are a home owner, bankruptcy can affect your home and it is a possibility that your home will have to be sold

    If you own your home any interest you have in it may have to be sold to pay your debts. The sale may be put off for 12 months after your bankruptcy.

    Purchasing your interest

    Your spouse, partner, a relative or friend may be able to buy your interest in your home from the trustee. This would prevent the property being sold.

    Increase in property value

    The benefit of any increase in value of your home will go to the trustee to pay your debts, even if it is sold after you have been discharged from bankruptcy.

    Until your interest in the home is sold, or the trustee obtains a charging order over it, that interest will continue to belong to the trustee for a certain period, usually 3 years. This includes any increase in its value.

    If the property cannot be sold

    If the trustee cannot, for the time being, sell your home, they may obtain a charging order on your interest if it's worth more than £1,000.

    If a charging order is obtained, your interest in the property will be returned to you, but the legal charge over your interest will remain.

    Your home may be returned to you

    After 3 years your home may be returned to you if your trustee has not:

    • sold or obtained a charge over your interest in the property
    • applied for an order of possession or obtained a charging order
    • come to any arrangement with you about your interest in your home

    See further information on how bankruptcy can affect your home from the Department for the Economy (DfE).

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  • How bankruptcy affects your income

    How bankruptcy affects your income, including income payment orders and income payment agreements

    You may have to make payments towards your bankruptcy debts from your income.

    How much you will pay depends upon what you can afford after reasonable domestic needs have been taken into account. This amount will be based on allowable outgoings and expenses determined by the Insolvency Service.

    Income Payments

    Payments from your income can either be:

    • ordered by the Court using an Income Payment Order (IPO)
    • made voluntarily through an Income Payment Agreement (IPA)

    There are no fixed guidelines on IPAs or IPOs.

    Income Payment Order (IPO)

    Your trustee may apply to Court for an IPO which requires you to make contributions towards your bankruptcy debts. An IPO will not be made if it would leave you without enough money to live on.

    An IPO can:

    • be changed if income increases or decreases
    • last for up to 3 years and continue after your bankruptcy has ended

    Income Payment Agreement (IPA)

    An IPA is a written agreement between you and your trustee to pay a certain amount towards your bankruptcy debts. The agreement last for a certain period and cannot be longer than 3 years.

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  • How bankruptcy affects your assets and bank account

    How bankruptcy affects your assets and bank account, including disposal of assets, recovering assets, bank accounts and life assurance

    If you are made bankrupt a trustee will take control of all your assets.

    You must disclose the following items to the trustee: 

    • tools, vehicles and other equipment you need in your employment or business
    • clothing, household equipment and other basic items your family need (based on allowable outgoings/expenses determined by the Insolvency Service)

    The trustee may let you keep these items unless they can be replaced with a suitable alternative.

    Disposal of assets

    The trustee will take control of all your other assets. They will dispose of them and use the money to pay your creditors. Some of the money raised may be used to pay the insolvency practitioner's fee if one has been appointed.

    Recovering assets

    The trustee may apply to the High Court for an order restoring property to them if you disposed of it in a way that was unfair to your creditors. For example, if you transferred property to a relative for less than it was worth.

    Any property you obtain while you are bankrupt may also be claimed by the trustee.

    Bank accounts

    You must give the trustee your bank cards, cheque books and credit cards. Your accounts will be frozen but the trustee may release:

    • any money you need urgently to live on - for example, to buy food
    • your spouse or partner's share of any money in a joint account

    After the bankruptcy order has been made you may open a new bank account. You should tell the bank that you are bankrupt.

    Life assurance

    The trustee may claim any interest you have in a life assurance policy. The trustee may be entitled to sell or surrender the policy and collect any proceeds on behalf of your creditors.

    If the policy is held in joint names you should contact the trustee to discuss how the policy should be dealt with.

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  • Bankruptcy restrictions

    Overview of bankruptcy restrictions that are placed on a person who is declared bankrupt

    If you are made bankrupt you will have certain bankruptcy restrictions placed on you.

    During your bankruptcy it is a criminal offence to:

    • obtain credit of £500 or more without disclosing your bankruptcy
    • act as a company director
    • create, manage or promote a limited company without Court permission
    • work as an insolvency practitioner

    Additional bankruptcy restrictions

    There are some additional restrictions during your bankruptcy including, that you:

    • may not hold certain public offices
    • may not act as a trustee of a charity or pension fund

    If you break any of these restrictions you may be prosecuted and/or the date that your bankruptcy ends may be delayed.

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  • How long does bankruptcy last?

    Bankruptcy lasts a maximum of 12 months but there is the option to end bankruptcy early or you may incur a delayed discharge by the Court

    If you comply with your bankruptcy terms, you will be automatically freed from bankruptcy (known as discharged) after a maximum of 12 months from the date of your bankruptcy order.

    All restrictions in connection with your bankruptcy will be removed. However, you have a duty to continue to assist your trustee if required.

    Proof of discharge

    Discharge is usually automatic and you won't be sent a letter.

    To get proof of discharge you can:

    • ask the trustee for a confirmation letter
    • ask the OR for a confirmation letter
    • ask the Court for a Certificate of Discharge (fee applies)

    Ending bankruptcy early

    The Court may cancel your bankruptcy order and discharge you at any time if:

    • all debts, fees and expenses relating to your bankruptcy have been paid in full
    • the High Court decides the bankruptcy order should not have been made

    Arrest of discharge

    If you have not carried out your duties as a bankrupt the Official Receiver may apply to the High Court for your discharge to be postponed.

    If the High Court agrees, your bankruptcy will only end when the suspension has been lifted.

    Your credit rating

    Credit rating agencies will not be notified of your discharge. You should send them a copy of an official document detailing your discharge.

    Debts after bankruptcy

    Bankruptcy deals with your debts on the date when the bankruptcy order is made. If you incur new debts this could result in:

    • a further bankruptcy order
    • prosecution if, when you incurred the debts, you did not disclose that you were bankrupt
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Raising finance for our business - See.Sense. (video)

In this guide:

  • Eight types of non-bank financial support

    The main types of non-bank financial support for businesses including non-banking financial institutions and equity finance

    Although it is common for people in business to approach banks for finance, there are other options available that may be a better fit for your business. Non-bank lenders may have lower interest rates and charges, and be able to make loans over a longer period than a bank. They can also be less restrictive about high loan to value and issues like poor credit rating or experience of recent losses.

    It is important you read all agreements carefully before you borrow from a non-bank lender and find out if any assets will be required as security.

    If you are interested in obtaining finance from a non-bank lender, consider the following:

    1. Commercial loan providers

    Commercial loan providers - also known as non-banking financial institutions - are organisations that provide financial services like loans and credit facilities, but don't have a banker's licence. This means they cannot take deposits from the public or offer normal banking facilities such as overdrafts. However, they can have less restrictive lending criteria and may be a useful and competitive source of funding.

    Commercial loan providers in Northern Ireland include:

    2. Social and community lending

    You may be able to borrow money from a credit union which is likely to be more affordable than a bank loan. There are also various lenders that offer loans to disadvantaged groups, community businesses and social enterprises. See social and community lenders.

    3. Joint ventures and partnerships

    One way to increase resources is to enter into a joint venture with another business. This can offer many advantages - such as increased capacity, access to new markets and the availability of greater technical expertise. See joint ventures and business partnerships.

    4. Factoring and invoice discounting

    It may be possible for you to raise funds against unpaid invoices. Invoice discounting, factoring or supplier finance can all be useful methods to improve your business' cashflow. See factoring and invoice discounting.

    5. Equity finance

    You could sell shares in your business if you want to raise long-term finance. This would mean you won't have to repay the debt or pay interest, but it will involve partly giving some ownership of your business and its future profits. There are various sources of equity finance, including venture capital, the stock market and business angles. See equity finance.

    6. Crowdfunding

    Crowdfunding is where a number of people each invest, lend or contribute small amounts of money to your business or idea. If you seek funds this way, you would typically set up a profile of your project on your website then use social media and various networks of business, family and friends to raise the money. See crowdfunding.

    7. Family and friends

    Family and friends can offer credit on a flexible, long-term and low-cost (or free) basis. You should make sure that the terms of any loan are clearly understood by both parties. See financing from friends and family.

    8. Government financial support

    If your small business is struggling to access bank finance, there is a government scheme in which the UK's biggest banks will pass on details of any businesses they have rejected to alternative finance providers. These are:

    If your business is new or expanding, you could be eligible for business development grants or other government support schemes. See grants and government support.

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  • Social and community lenders

    Applying for business loans from credit unions, the Prince's Trust and co-operative and community finance

    Social lenders are generally non-profit making organisations that can offer loans and credit.

    Co-operative and community finance

    Employee-owned or community businesses can apply to borrow money from the Industrial Common Ownership Finance Fund. Eligible organisations include social enterprises, co-operatives, development trusts and charitable businesses.

    Find out about loan eligibility with Co-operative and Community Finance (Coop).

    Credit unions

    Credit unions offer loans that are accessible and affordable. They are owned and controlled by their members. This means they have to make decisions that are in members' best interests, rather than to make money for external shareholders. There are also no penalties for repaying loans early.

    Find out about credit union loans with the Association of British Credit Unions Limited (ABCUL).

    The Prince's Trust

    If you are aged between 18 and 30, you may be able to get financial support from the Prince's Trust. The charity's Enterprise Programme provides loans, grants and advice so that disadvantaged young people can start their own businesses. To be eligible, you need to be unemployed and unable to raise all the finance you need from other sources. Read about the Prince's Trust Enterprise Programme.

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  • Non-bank funding for short and long-term use

    Where you can find short and long-term business finance from non-bank providers

    There are alternatives to standard business loans that you may find are more suitable for your needs - particularly if you need the money for a long or short period. Some of these options are also available from banks. Your type of business and its current needs will determine the choice of provider.

    Short-term funding

    If you have a temporary cashflow problem, eg non-payment from a creditor, short-term funding may be able to help. Short-term funding sources include credit cards, payday loans and invoice finance.

    Credit cards are available from building societies as well as banks, and these can be used to make business purchases using credit. However, it is important that you keep track of your credit card spending, as it is among the most expensive forms of credit - see types of payment cards available.

    Payday loans are very short-term loans that can be applied for online or over the telephone. Interest is calculated on the amount you borrow and the agreed repayment date, which can range from one day to a maximum of one month. Rates of interest can be high, especially when compared by APR, but can be cheaper than an unarranged overdraft. You should always check that the lender is reputable.

    Invoice finance offers ways to access working capital by unlocking the value of invoices - although interest rates and charges apply on the cash advanced. There are three main types of invoice finance:

    • invoice discounting - this allows you to draw on funding secured against approved invoices
    • factoring - this involves you selling your invoices to your financier for them to process
    • supplier finance, also known as 'supply chain finance' or 'reverse factoring' - if your buyer offers this it can give the same benefits as factoring, but usually at a much lower cost

    See factoring and invoice discounting.

    Long-term funding

    If you are looking to expand your business or fund a new product or service, longer-term funding and investment can help. Non-bank investors can be a good source for small businesses, as many are prepared to lend to riskier ventures, such as start-ups.

    Equity finance can provide investment in exchange for a share of the company or its future profits. This could be through business angel or venture capital investment, or by issuing shares in your business - perhaps to family, friends or employees.

    For more information, see:

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  • Obtaining non-bank investment

    How to secure an investment for your business by preparing for a lender's requirements

    Before approaching a non-bank investor, you should make sure your business is investment ready by:

    • keeping yourself well informed about your business finances
    • having an up-to-date business plan
    • being clear about the amount of money you require and what it will be used for
    • carrying out market research to demonstrate that there's a market for the products or services that you intend to sell
    • producing cash flow projections for the next 12 months to show that you will be able to afford repayments, including interest and fees
    • carrying out a SWOT analysis (strengths, weaknesses, opportunities and threats relating to your business)
    • ensuring your business and personal credit ratings are up to date and error-free

    For more information, see measure performance and set targets.

    Getting the best deal

    When looking for finance for your business, it is important that you choose the option that best suits your business - see business financing options - an overview.

    You should compare different providers of non-bank finance - if necessary using a finance broker - and always read and research the small print of any investment offers.

    Loan guarantees

    Most non-bank lenders will ask you for some form of guarantee before granting a loan. This could include assets such as property owned by the business. You may also be required to ask another person or another business to act as a guarantor and guarantee the loan. The guarantee means that the lender will claim from the guarantor if your business cannot meet the repayments.

    Some lenders will also require personal guarantees - eg from your board of directors or business backers.

    Many loan providers require you to take out loan repayment insurance to cover repayments if your business meets cashflow problems.

    For more information, see providing a guarantee for your loan.

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  • Avoiding loan sharks to fund your business

    Advice on how to spot unlicensed lenders and why you shouldn't borrow money from them

    Take care to avoid unauthorised lenders - otherwise known as loan sharks. An unauthorised lender may give you quick access to credit, possibly without needing a business plan or security, but there may be drawbacks including unfavourable interest rates and loan terms.

    To find out if a lender is licensed by the Financial Conduct Authority (FCA) you can search the Financial Services Register.

    You may be dealing with a loan shark if:

    • the salesperson is pestering you or is particularly pushy
    • the interest rate is significantly higher than other lenders
    • the company is reluctant to show you the loan terms and conditions
    • you are asked to tie yourself into a longer-term contract than you need

    You may also find yourself a target for loan sharks if you have a poor credit record and would normally find it difficult to raise finance. Read GOV.UK guidance on loan sharks.

    For information on how you may be able to secure non-bank finance, see eight types of non-bank financial support.

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  • Non-bank finance

    Raising finance for our business - See.Sense. (video)

    See.Sense co-founders Philip and Irene McAleese talk about how they used a successful crowdfunding campaign to bring their product to the marketplace

    See.Sense. is an electronic systems design company specialising in cycling lighting and technology applications. See.Sense. wanted to bring a new intelligent bicycle light through production to market, and considered funding options to achieve this.

    See.Sense. co-founders Philip and Irene McAleese explain why crowdfunding was the perfect fit for their company and product, describe how early market testing and interaction with customers brought benefits to their design process, and talk through some of the benefits and potential drawbacks of a crowdfunding campaign.

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Managing financial difficulty

Introduction

Crowdfunding websites

In this guide:

  • Is crowdfunding right for your business?

    Guidance to help you decide if crowdfunding is right for your business.

    Crowdfunding can be a way of raising finance relatively quickly, often without upfront fees. It provides an alternative to funding from conventional means (eg a bank loan).

    To raise funding you will typically have to showcase your idea to potential investors through a crowdfunding website. An investor will select what they want to get in return for providing a specific amount of money. This is usually based on what you decide to offer - this could be a stake in the company, a percentage of your profit or even rewards, such as gifts.

    Crowdfunding can help you to generate funds for a project but can also allow a business to market test a product that may only be in planning phase. This process of raising this type of finance may also help to promote a business or product before it has launched.

    Investors using crowdfunding will often look for:

    • evidence of a tested idea that has the potential for future growth and development
    • an idea belonging to a high growth sector (eg technology), or an industry that the funder has a personal interest in
    • a niche idea that has an established audience in the marketplace

    See Nesta's (National Endowment for Science and Technology and the Arts) guidance on understanding alternative finance.

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  • Types of crowdfunding

    An overview of the different crowdfunding options and the benefits of each.

    There are different crowdfunding options to choose from. Each type has different benefits for businesses and investors. You will need to consider which one is right for your business, project or venture.

    Reward crowdfunding

    Reward crowdfunding allows investors to contribute to your venture in return for non-financial benefits.

    This type of funding is commonly used for creative projects. It usually operates as a tired system - the more an investor donates to your fund, the greater the reward they will receive (eg credits on a record cover, tickets to an event, free gifts etc). A benefit to the business is that the reward doesn't usually cost much to deliver.

    Debt crowdfunding

    Debt crowdfunding provides investors with the chance to fund your project in exchange for financial interest on their investment.

    This finance option may provide you with borrowing at a lower cost than that offered by applying for a loan through a bank. The advantage of this model is that it may be easier to win support for a campaign, as the backers are attracted to getting a return. This type of crowdfunding may work best for businesses with a track-record of revenues.

    Equity crowdfunding

    An equity crowdfunder will invest money in return for shares, or a small stake in your business, project or venture.

    This type of crowdfunding could work best for growth-focused companies in areas where there is potential for return.

    Donation crowdfunding

    This type of crowdfunding is designed for charities, or those who raise money for social or charitable projects, to gather a community online and to enable them to donate to a project.

    While most established charities coordinate this through their own website, crowdfunding platforms can be useful for smaller organisations and people raising money for personal or specific charitable causes.

    NESTA (National Endowment for Science, Technology and the Arts) has published crowdfunding guidance which provides further information on the different types of crowdfunding, statistics, examples and key considerations. 

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  • Things to consider when choosing a crowdfunding website

    Things to consider when choosing a crowdfunding platform.

    As crowdfunding becomes a more popular form of raising finance for business projects, there are a growing number of crowdfunding websites available to host your funding campaign. It is worth taking the time to research the different online platforms to find the one that will work for you.

    There are a number of things to consider when choosing a crowdfunding platform.

    Type of investors

    Individual, business and institutional investors can all pledge money to a project, but some platforms stick to having one specific type of investor.

    Fees

    Different platforms have different structures to price their services. These might include arrangement fees, administration fees, legal fees, success fees, transaction fees, commission fees etc.

    Type of platform

    Some platforms are purely a page that brings businesses and investors together. Others have a more active role such as one to one support and advice with your campaign.

    Platform format and design

    Each website offers its own model, layout and pledge process, which attracts certain types of investors. Knowing what's important to potential investors and which platforms they like will help determine which is most likely to lead to the funding target being reached.

    Security

    Will investors feel secure giving money to the website? You must ensure that the platform you choose to use is secure and follows all legal requirements when handling online funding transactions.

    General v niche site

    Different platforms focus on different types of project. There are even platforms specifically for certain types of projects, from charities to technological products.

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  • Crowdfunding websites

    Overview and examples of crowdfunding websites that can be used to fund your business, project or venture.

    There are many crowdfunding platforms, each with different funding models and requirements. It's important to research and choose one that's best for your business, project or venture.

    Kickstarter is a funding platform for creative projects.

    Indiegogo is a funding website for nearly any kind of idea, business or project. 

    Read NESTA (National Endowment for Science, Technology and the Arts) guidance on other crowdfunding platforms.

     

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  • Regulation of crowdfunding

    Overview of the regulation of crowdfunding by the Financial Conduct Authority in the UK.

    Crowdfunding is mostly unregulated. From 1 April 2014, the Financial Conduct Authority (FCA) started to regulate some forms of crowdfunding in the UK.

    The FCA regulates:

    • Loan-based crowdfunding: also known as 'peer-to-peer lending', this is where consumers lend money in return for interest payments and a repayment of capital over time.
    • Investment-based crowdfunding: consumers invest directly or indirectly in new or established businesses by buying investments such as shares or debentures.

    The FCA also regulates payment services provided in connection with:

    • Donation-based crowdfunding: people give money to enterprises or organisations whose activities they want to support.
    • Pre-payment or rewards-based crowdfunding: people give money in return for a reward, service or product (such as concert tickets, an innovative product, or a computer game).

    Find out more about the FCA's crowdfunding policy and how you can protect yourself.

    Download the FCA's regulatory approach to crowdfunding over the internet (PDF, 2K).

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  • Advantages and disadvantages of crowdfunding

    The advantages and disadvantages of using crowdfunding to finance your business idea.

    If you are considering raising finance for your business, project or venture through crowdfunding, there are a number of factors that you might want to consider.

    Advantages

    Eight advantages of crowdfunding:

    • it can be a fast way to raise finance with no upfront fees
    • pitching a project or business through the online platform can be a valuable form of marketing and result in media attention
    • sharing your idea, you can often get feedback and expert guidance on how to improve it
    • it is a good way to test the public's reaction to your product/idea - if people are keen to invest it is a good sign that the your idea could work well in the market
    • investors can track your progress - this may help you to promote your brand through their networks
    • ideas that may not appeal to conventional investors can often get financed more easily
    • your investors can often become your most loyal customers through the financing process
    • it's an alternative finance option if you have struggled to get bank loans or traditional funding

    Disadvantages

    Six disadvantages of crowdfunding:

    • it will not necessarily be an easier process to go through compared to the more traditional ways of raising finance - not all projects that apply to crowdfunding platforms get onto them
    • when you are on your chosen platform, you need to do a lot of work in building up interest before the project launches - significant resources (money and/or time) may be required
    • if you don't reach your funding target, any finance that has been pledged will usually be returned to your investors and you will receive nothing
    • failed projects risk damage to the reputation of your business and people who have pledged money to you
    • if you haven't protected your business idea with a patent or copyright, someone may see it on a crowdfunding site and steal your concept
    • getting the rewards or returns wrong can mean giving away too much of the business to investors

    For a comprehensive overview of crowdfunding as an alternative form of raising finance for your business, see Nesta's (National Endowment for Science and Technology and the Arts) guidance on understanding alternative finance.

    Before deciding on a crowdfunding platform for investment, you might consider whether other forms of finance could better meet your needs - see alternatives to equity finance.

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  • Seven tips on how to run a successful crowdfunding campaign

    Top tips and advice to help you run a successful crowdfunding campaign

    With the growing popularity of crowdfunding as a way of raising business finance, it is important to consider how to make your campaign stand out from others. Here are some tips for a successful crowdfunding campaign.

    1. Think about your total investment goal

    When setting your investment goal try to make it as low as possible. Calculate how much money you need to cover your campaign goal and any extra expenses, including the fee that the platform takes. Do not look at crowdfunding as a way to make profit at this stage. A target of £800 that is exceeded is much better than a target of £5,000 which is unsuccessful.

    2. Market your crowdfunding campaign

    Marketing your crowdfunding campaign is central to its success. Crowdfunding platforms will host your project but it is your responsibility to promote your campaign before it starts. Set aside time before your campaign launch to use social media, press, networking, exhibitions, local radio and promotional materials to create a buzz around your project. Aim to have a number of interested investors ready to back your project on day one of your campaign.

    It is also very important to plan promotion of your crowdfunding campaign during the campaign as you may experience a lull after the initial launch.

    3. Gain social proof for your project

    Talk to your friends and family about your project - are they willing to invest in your project? If the answer is no, it is unlikely that investors with visibility of thousands of competitive projects would want to back you. Ask your family and friends for feedback and learn from it.

    If your family and friends are interested in investing, this can be a great sign that you have a good idea - make sure that all these people are ready to start funding your project on the first day of the crowdfunding campaign. This will help to create a buzz around your project and can encourage other potential backers to invest.

    4. Research similar projects for inspiration and tips

    Some crowdfunding platforms do not take down campaigns once they have finished (whether successful or unsuccessful), this is a great opportunity to research similar projects to your own and see what works well and what doesn't.

    5. Create a video that captures your audience and promotes your project clearly

    Set aside a video budget to make sure that it is interesting and clearly presents the benefits of your project. When planning the content, create a video that can be used for future marketing opportunities to get the most for your money.

    6. Communicate effectively and honestly with all your backers and potential backers

    Make sure you communicate clearly about what your project is, what it is trying to achieve, how much money is needed to make it a reality and what you will deliver and when. Answer all questions that are directed at you. When possible answer the questions publically but in some cases you may prefer to reply privately.

    When you do have backers, make sure that you keep them up to date with your product and always let them know if you do not think you will make a deadline you had previously set.

    7. Be creative if you are offering rewards

    If you decide to go for reward crowdfunding, let your potential backers know what's in it for them and make your rewards interesting if you can. One option is to offer different rewards for different levels of investment - this can encourage a potential backer to add more to their investment.

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