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The View... Start-Up Funding
29/08/2016 - 07:00
Never before have there been as many start up financing options as there are now. New businesses are popping up all the time, and investors everywhere are looking for the next big thing.
Stephen Barnett, founder of Catalyst Founders, highlights three pillars of start up financing for entrepreneurs looking to start, grow and sustain their businesses.
It’s an ugly, but important concept; one that should be understood in order to encourage growth and maximize ownership for coffee entrepreneurs. Debt has negative connotations; you were brought up not wanting to borrow money and now you want some, no bank will lend you any. This is changing through a number of major innovations:
Peer-to-Peer Small Business Lending
A revolution in financing small businesses, peer to peer lending matches lenders like you and me, hungry for a return on our investment, to small businesses owners, who want to borrow (from GBP5k to GBP1m) to grow their business or support them through a tricky period of trading. Funding Circle, the leading light of peer-to-peer lending has lent GBP2bn over the past five years, to small and growing businesses up and down the country. Companies like Bramley and Gage, the liqueur distiller based in Gloucestershire and Moo Free Chocolate, the dairy and gluten-free chocolate producer, have both benefitted from available and reasonably priced loans.
Peer-to-Peer Invoice Financing
A bug-bear of many young businesses; you pay up front for your materials, yet your customers take up to 90 days to pay your invoices. This cash flow black hole can cripple many young businesses, including coffee roasters and wholesalers. Market Invoice, a leading light in peer-to-peer invoice financing, lends you money; GBP5k – GBP3m, up to 90% of your outstanding invoices, on the day that invoices to customers are created.
Start Up Loans
The government Start Up Loan scheme aims to provide personal loans for individuals as they embark upon their entrepreneurial venture. You can borrow up to GBP25k (the average loan is around GBP6k) at roughly 6% for up to five years. The scheme is worth taking a look at but be aware; these are personal loans with default having implications on your credit rating and existing financial obligations. Novo Coffee House serves as an example of a retailer taking advantage of a startup loan to finance the refit of their Dewsbury based coffee shop.
There comes a time in every start up’s life where they have to consider raising equity to turbo-charge their growth ambitions. Equity is not a dirty word; the investment you receive, if well timed, can be the making of your business. Unlike debt, there are no obligations to pay back the money you have borrowed, this comes at the expense of assigning a percentage of your precious company. There are lots of traditional forms of equity investor; angel, venture capitalist, friends and family, however new forms of equity investment are gaining momentum.
Another somewhat mythical word, equity crowdfunding opens up your proposed investment to anyone and everyone. As an ‘investor’, I can search through hundreds of weird and wonderful companies on Crowdcube or Seedrs, the most popular crowdfunding platforms. I can invest as little as GBP10 in a range of companies, all at different valuations. There are some fantastic success stories. London Union, the Giles Coren-backed market ‘city’, based in East London raised GBP25m and Brewdog, the Aberdeenshire-based brewery, raised GBP10m. Equity crowdfunding is not only suitable for these gastronomic unicorns, but smaller companies too, including Miripiri, the chilli jam producers, who are aiming to raise GBP2,500 from crowdfunding.
I started Catalyst Founders six months ago, with the express vision to support young entrepreneurs from up and down the country. We look to invest in the next generation of practical, creative entrepreneurs who have an idea that they think can become a world-beater. We love retail, restaurants, hospitality and tourism and tend not to invest in tech (you will find plenty of other investors interested in technology).
3. Donation-based Crowdfunding
A relatively newcomer, donation-based crowdfunding sites have the advantage of not having to take on debt, or give a percentage of your precious company. Instead, you work to source donations in return for gifts.
Kickstarter, the US based not for profit, has successfully revolutionized both the funding and advertising industries. The concept is simple; you raise money by offering rewards for different levels of donations.