The merits of outside investment for start-ups
Most start-ups begin by funding themselves through founder savings, family loans or early revenue ploughed straight back into the business.
However, at some point, many reach a stage where growth needs more capital than the business can generate on its own.
That is when outside investment starts to look attractive, but rather than throw your business into a real “Dragon’s Den”, there are other options, such as debt finance or grants, which are often overlooked.
Both of these routes have real merits, but neither is simply a case of applying and waiting for the money to land in your account.
What sits behind the application matters just as much as the application itself and that is true whether you are talking to a bank, a fund or a grant panel.
The case for debt finance
Debt finance covers everything from start-up loans and asset finance to invoice finance and traditional bank lending.
It is the most traditional route for most businesses, but one that carries new risks, not least the debt itself.
For owners, it feels familiar with the lending you do in the rest of your life. You borrow what you need, repay it on agreed terms and the business stays entirely yours.
Unlike equity investment, taking on debt does not mean giving away a stake in the company or a seat at the table for someone else’s opinion on how it should be run.
Founders keep control of decision-making and any growth in value belongs to them rather than being shared with outside shareholders.
There can be tax benefits too since interest payments are typically deductible against profits.
A history of managing debt responsibly also builds a credit history that makes the next round of finance easier to access, whether that is a larger loan or a more sophisticated funding facility.
The trade-off, as mentioned, is that debt has to be repaid regardless of how the business performs.
Repayments can put a real strain on cashflow and a quiet quarter does not pause the obligation, so it tends to suit businesses with a predictable revenue pattern rather than ones still finding their feet.
The case for grants
The UK has a wide and varied pool of grants available to start-ups and scale-ups, but many remain overlooked.
Grants work differently to debt, as they do not need to be repaid and they do not dilute ownership, which makes them an attractive option, particularly for businesses developing new products, technology or processes where eligible schemes are often available.
Winning a grant can also be a useful signal to other funders. If an independent panel has assessed your business and decided it is worth backing, that carries weight when you later approach a bank or investor.
The downside is that grants are competitive, often slow to come through and rarely cover the full cost of a project.
Many require match funding from the business itself and the terms can be restrictive about exactly what the money can be spent on and how that spend needs to be evidenced.
Nevertheless, their usefulness as a source of finance should not be ignored and it is worth speaking with your accountant about the opportunities open to you.
Capital is rarely the hardest part
Whichever route a business pursues, the money itself is usually not the main obstacle. The harder part is being ready to ask for it, in a way that stands up to scrutiny from someone who does this for a living and sees dozens of applications a month.
That is where the real work sits and it is worth investing time before you invest money in seeking outside finance.
Put a proper business plan in place
A funder wants to understand the business well before they consider the numbers: what it does, who it serves, what makes it different and where the funding fits into the bigger picture.
A good business plan ties all of that together. It explains the market, sets out how the business makes money, identifies who is involved and shows precisely what the funding will be used for and why it matters to the next stage of growth.
Generic plans, the sort that read as if they could apply to almost any business, tend not to land well. The ones that work are specific, grounded in the realities of the sector and honest about the risks as well as the opportunities.
Develop projections that can survive a hard look
Numbers tell their own story and funders read them closely. Optimistic projections with no clear basis for the assumptions behind them are usually the first thing to unravel under questioning.
Strong projections build from the ground up: realistic sales assumptions, a clear view of costs and cash flow modelling that goes beyond the profit and loss account.
It can be hard to accept, but cash, not profit, is what keeps a young business afloat and lenders and grant assessors know that better than most.
It also helps to show your working through sensitivities, such as what happens if revenue comes in 20 per cent lower than forecast or if a key cost rises.
A plan that has clearly been stress-tested signals a level of financial discipline that funders take seriously.
Understand grant assurance before you apply
Grant assurance is increasingly a standard part of the process, particularly for larger or publicly funded schemes.
It is the independent verification that the money claimed has actually been spent in line with the grant’s terms, supported by evidence rather than assertion.
That might mean an accountant reviewing expenditure against the original application, certifying that costs claimed are eligible or providing assurance reports at agreed milestones throughout the project.
Funders need confidence that public money or scheme funds are being used as intended and assurance is how that confidence is demonstrated.
Businesses that build this into their process from the outset, keeping clean records and being clear about which costs sit against which funding stream, tend to have a far smoother experience than those trying to reconstruct an audit trail after the fact.
Get the fundamentals right behind the scenes
None of the above works well without solid financial fundamentals already in place. Up-to-date bookkeeping, a clear separation between personal and business finances and management accounts that give an accurate, current picture of the business all matter long before an application is submitted.
Funders can usually tell quickly when this groundwork is missing. Gaps or inconsistencies in the numbers raise questions and questions slow down or derail an application that might otherwise have been straightforward.
Getting investment-ready
Outside investment, whether through debt or grant funding, can be a genuine accelerant for a start-up that is ready for it.
The businesses that get the most from it are rarely the ones with the flashiest pitch, but the ones with a credible plan, defensible projections and the financial groundwork to back it all up.
If you are considering outside investment and want to make sure your business is in the strongest possible position to apply, speak to our team at Scholes.
