5 Types of Investments That Will Help Fund Your SME
by James P. Outreach & PR ExecutiveEntering a flash recession, with signals the UK economy is already on
the recovery following the financial difficulties of the coronavirus
pandemic, there’s never been a more important time to secure additional
investment for SMEs to help continue growth for their business.
Understanding how your business is growing and will develop in
the next steps of your business strategy is essential as we navigate this
ongoing period of uncertainty. Furthermore, recognising which investment fund
is the best option for your business needs clarity.
Here, we look at five different types of investment and how
they can fit into your business model, with positives and negatives.
1.
Bootstrapping
The best investment is self-investment. Bootstrapping is the
act of using personal finances or operating revenue to start or grow a business.
In this situation, business owners with little capital invest their own money
rather than relying on outside investment that could dilute their shares in the
company.
The benefits of this technique include maintaining control
and shares in your company. When using your money, you own the risk of
failure―but you also own the opportunity of string returns and increased
profitability. Equally, there are disadvantages to bootstrapping. Your personal
finances can be strained by this method and you may not be able to raise as
much capital as you would from other sources of investment.
This investment strategy does have one overwhelming
advantage―after the initial personal investment, future external investments
can still be considered. Maintaining control while growing your SME means that
the ability to take on investors in the future is less constrained by input
from other people.
2.
Friends and family
There’s another way to raise capital for your SME growth
without venturing too far from home. If it is available, using investments from
family or friends can help to kickstart your growth.
As a positive, this is one of the easiest ways to secure
money for your SME. Even more, by giving shares in your company to family
members in return for capital, you can rely on them as trusted advisors with
motivation to see your business grow. Like bootstrapping, it also opens
opportunities for future external investments as ownership of your business is
localised, but additionally proven to be worth investment by other people.
Friends
and family invest more in start-ups and small businesses than any other
type of investor, with $60 billion (£46.2 billion) ventured every year, making
up 38 per cent of all investments.
There is one essential downside to this method, and it comes
with failure. If your family or friends’ investment is not returned and your
business growth strategy does not work, these close relationships can be
strained irreparably. This emphasises the importance of formality in
investment―propose your plan and be upfront to any investor about your plans
and potential risks. A thorough plan is the most investable.
3.
Small business loans
SMEs are at the heart of the UK economy. In 2019, SMEs
accounted for 99.9 per cent of the UK business population, according to official
government reports. The government encourages the growth of small businesses,
with the UK placed within the top 10 countries globally to start an enterprise.
For this reason, the UK government has published a list of government-backed
support and finance for growing businesses. The list is refinable to meet your
needs, including your current business size, how many employers you have, which
sector and industry you belong to, and optimised for regional
investment―putting you in the vicinity of the best investors.
One major benefit of a small business loan is that the
investment does not take shares in the company and they do not have any say in
how the loan is spent in your business. However, with loans, the financial risk
is largely your own. Loans must be paid off, even if your growth strategy does
not succeed, putting further financial constraints on your business.
4.
Private investors
When utilising equity investments, it important to
understand what your SME can get out of the arrangement. Investors usually give
out high capital but expect high returns when your business grows. It should be
noted that investors are in your business for the long run, and they are
motivated to see your business grow for their personal profit. There are two
main types of investors who may be interested in your growing SME.
Angel investors
Usually approaching businesses while they are starting,
angel investors offer more than capital for businesses. Angel investors often
have a support network of other businesses that can help your company to grow,
with insight into the best approaches to grow and develop your platform.
Some angel investors specialise in particular sectors and
industry, using knowledge and experience to help you with your business.
However, the investment is not dedicated, with investor portfolios meaning that
their attention is often diluted between different organisations.
Venture capitalists
Venture capitalists invest in companies that demonstrate
growth potential in return for an equity stake in business. These investors are
essential to SMEs who do not have access to equity markets to raise capital for
their business. Usually targeting companies on the brink of commercialisation,
venture capitalists can provide helpful insight to business strategies while
building a network for your organisation. There is no obligation for repayment.
There are negatives―if your business is not ready to grow,
you may risk failure. Investors also hold stakes in your company, meaning that
it is more difficult to offer future shareholders.
5.
Crowdfunding
Crowdfunding is a relatively new concept in the world of
investment, starting in Britain in 1997 as a way for musicians to tour through
donations from fans. Today, crowdfunding is an essential investment for many
start-up businesses and growing SMEs. In fact, the global crowdfunding market
is expected to grow to $300
billion (£230 billion) by 2030.
Crowdfunding works by having people interested in your
company’s product or service make donations to a campaign that, if successfully
raising a target amount, will expect a small favour in return for their
support. These favours can be differentiated by the size of the donation and
are often made explicit in the campaign. For example, if you were to create a
campaign focussed on the development of a new product, a large donation may be
considered as a pre-order for when the product has been made, a small donation
may allow donators to receive a discount or exclusive early access to the
product. The most creative campaigns are often the most successful.
The benefits of crowdfunding campaigns include the increased
focus and attention on your brand during the campaign, with donators often
sharing information about your product to ensure more donations to meet the
target. Like bootstrapping, the money is yours and uncontrolled without sharing
equity. However, there is a high rate of failure for crowdfunding campaigns.
Failed campaigns can also damage your company’s reputation.
Whichever route you take you must make sure that you are
ready for a level of due diligence from the funder. At the very least, you will
need to have audited
accounts ready, forecasts, and a story that excites any potential investor.
When searching for investment, clarity is key. You must
understand your strategy and the potential failings of your plan before you receive
internal or external investment. After all, thorough planning is the best way
to avoid any risk. Before seeking investment, ensure that you recognise every
aspect of your business and understand which aspects are most likely to ensure
your success in the future. This way, investment will be the best way to create
success for your business.
Sources
https://www.bbc.co.uk/news/business-54113948
https://www.fundable.com/learn/resources/guides/investor/types-of-investors
https://www.fundera.com/resources/crowdfunding-statistics
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Created on Feb 22nd 2021 07:05. Viewed 392 times.