The Cost of Money for Your Business

There are a lot of different kinds of money for businesses and projects, but you need to be really clear about what you need money for because different funding sources suit different needs. Each pot of money has a different cost, benefits, and criteria.

Listed here, in order from least cost to most, are the basic funding sources:

Savings

You don’t need shed loads of cash to fund some business models – it really depends on overheads and upfront costs. But regardless of the model, during the testing stage, it’s ideal that you put your own money in to get started. Anyone else who comes along to help financially is going to want to know that you did as much as you could and got as far as possible off your own back. Additionally, this means you own your whole business yourself. This is a great position to be in while you build value in your brand.

Cost: Just your own hard-earned cash

Benefit: Total ownership and freedom within your business and all the profit is yours

Amounts: You are limited by how much money you can spare

Grants

Grants are money that you don’t generally have to pay back with cash but do require you to hit milestones and report outcomes back. There are literally hundreds of different types of small business grants available for all different things (starting, growing, community outreach, working with neglected people etc.). The hard part is finding the ones you qualify for naturally and getting through the application process, which can be long and arduous. However, if you or your business qualifies, they can provide the financial impetus your idea needs to either get off the ground or grow into something bigger and better.

Cost: Time for upfront grant writing and back end reporting.

Benefit: Little to no cash cost (other than your time) and total ownership of your business or project

Amount: Varies grant to grant

Loans (family, friends, bank, peer to peer)

Friends and Family Loan

If you put in your own money and you need more, the next easiest place to go to is friends and family. Now while they might be willing to lend you the cash, this stuff can get messy, so explain the terms to them clearly from the start. How long it will take to get their money back, how much interest you’ll pay them and what happens if you can’t pay back the loan. It’s best to put a formal agreement in place to avoid grey area discrepancies and drama down the road.

Also, a family and friends loan does not have to be written the way a bank might. A typical bank loan requires an equal monthly payment over a fixed period of time. That may not suit a young company. Revenues in the early days will be volatile so a fixed payment could be difficult. Other options include paying interest only for a while until the business gets some momentum, or an agreement to pay a percentage of the monthly income each month so the payments rise and fall with the revenues of the business, or any other combination that suits you and your lender.

Cost: Loaning money between friend and family has been known to disrupt or end relationships, so make sure you’ve got a clear agreement of the terms.

Benefit: Good terms and easier access then formal arrangements and once the loan is paid off you still have total ownership of the business.

Amount: This is usually not a huge amount as you don’t want to be a position of bankrupting those you care about. Again, you are limited by what they can give you vs what you need.

Bank Loan

A bank loan is different as their terms tend to be non-negotiable and they will need something to be put up against the loan. There are more loans for new businesses than ever before with decent terms to help support new business in the UK. Check out Startup Loans, for instance, however, you will need to have a really clear and very detailed business plan and financial forecast to get this money released.

Cost: Time in getting your house in order. Interest and sometimes fines for late or early repayments. If the loan cannot be paid back whatever you have put up against it will be owed.

Benefits: Once the loan is paid off you still have total ownership of the business

Amount: The amount you can get is generally limited by what you need, in your business plan and what you can put up against the loan.

Peer to Peer

A peer-to-peer exchange site, such as Zopa or Funding Circle, will put you in touch with private lenders, and create a personal relationship between you and the lender, fostering trust and patience. A number of companies are now well-established in this space, and several offer generous terms. Indeed, Zopa offers personalised rates that don’t affect your credit score and it doesn’t charge early repayment fees.

Cost: Time in getting your house in order. Interest and other possible fees.

Benefits: Personalised rates that may not affect your credit score and may not charge early repayment fees and you still maintain total ownership of your business once the loan is paid off.

Amount: The amount you can get is generally limited by what you need, in your business plan and what you can put up against the loan.

Sponsorship (A.K.A Brand Partnerships)

Sponsorship is a cash and/or in-kind contribution in return for access to any exploitable commercial potential. This means that a brand will give relevant activities funding or for example free alcohol if they view the attending audience or the related publicity worth the cost to them. Sponsors or brand partners have an expectation of a commercial return.

Cost: Your time and achieving agreed outputs that tick boxes for the brand

Benefit: No direct financial cost, maintain total ownership of company and brand affiliation.

Amount: These vary wildly and are dependent on what of value you can offer to the brand.

Crowdfunding 

Reward

If you’ve been alive for more than 5 minutes you’ve probably been asked to contribute to a friends crowdfunding page. Crowdfunding is essentially asking lots of people to contribute small amounts of money to help fund a project or business in return for rewards.

Cost: Building good campaigns cost in both time and money and can be a massive undertaking, not to mention driving your friends and family nuts begging them for money. The other cost is the rewards and you must be careful to ensure these do not undermine the money you’re trying to raise.

Benefit: No direct financial cost, maintain total ownership of the company and you’ve built a supportive community of followers, many of whom will continue to support you as you develop.

Amount: These numbers can vary wildly and is dependent on how appealing your campaign is. Campaigns have been known to double or triple their goal amounts, but many also fail.

** There are programmes that match crowdfunding totals such as RBS’ Back Her Business programme, so if you are going down this path, look into match funding opportunities for additional capital.

 Equity

Equity crowdfunding is similar to Reward crowdfunding in that it takes place on a similar platform where the public has access to participate, however, the difference is that people invest in an opportunity in exchange for equity, rather than a small reward. This means that money is being exchanged for shares, or a small stake in the business, project or venture.

Cost: Building good campaigns cost in both time and money and can be a massive undertaking. You need to be able to defend all your figures and information as interested investors may well interrogate them. Additionally, you will be parting with shares in your business and thus won’t have total ownership or freedom. You will now have partners who you need to consult with on decisions.

Benefit: The biggest advantage is that you do not have to pay back the money. If your business goes under. Your investors are part-owners in your company, and because of that, their money is lost along with your company. You don’t have to make monthly payments, so there is often more liquid cash available.

Amounts: These can totally vary based on what you need in your business plan and the value of your company but many startups tend to go for around £150k as this is the magic number for the SEIS tax scheme which is an incentivisation programme to make investing in British businesses appealing.

 Angel Investment

Angel investment is pretty much the same as Equity Crowdfunding except it tends not to involve as many people. It does still require having a really tight business model and attractive numbers but it also means having access to investors in real life. Often these investors will invest in the founders as much as in the idea so there is an advantage to meeting people in person.

Cost: Building a solid deck can be a massive undertaking. You need to be able to defend all your figures and information as interested investors will interrogate them. Additionally, you will be parting with shares in your business and thus won’t have total ownership or freedom. You will now have partners who you need to consult with on decisions.

Benefit: The biggest advantage is that you do not have to pay back the money. If your business goes under. Your investors are part-owners in your company, and because of that, their money is lost along with your company. You don’t have to make monthly payments, so there is often more liquid cash available. Also ideally you have the support and an experienced advocate on board who can open doors and help the business succeed.

Amounts: These can totally vary based on what you need in your business plan and the value of your company but many startups tend to go for around £150k as this is the magic number for the SEIS tax scheme which is an incentivisation programme to make investing in British businesses appealing.

Other kinds of money

If you can believe it, there are still other kinds of money like venture capital, but you don’t need to know about those until you’re further down the road. The ones I’ve mentioned here are the big early-stage players and this is just a very general overview of them, but this is enough for you to start forming an idea about what kind of money is most easily accessible to you.

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