There are two main ways to raise capital for a business ‘ debt investment or equity investment. Chris Forbes, co-founder of The Cheeky Panda, outlines the pros and cons for both.
Raising money for a business, especially a start-up, can sometimes feel like a conundrum. It is usually achieved either through ‘debt’ or ‘equity.’ ‘Debt’ is particularly difficult for start-up companies to secure, unless it is asset-backed security. This means your loan is guaranteed against your house, for example. ‘Equity’ is a little easier and will depend on market opportunity. In other words, is your business yet to start trading or has it already generated early sales. Here are examples of both:
Equity Investments
Your network: As a start-up, the people most likely to back your business will be friends or family. Or perhaps people you have worked with previously. However, if you don’t have a network of people with plenty of spare capital, this may not be the best option for you.
Crowdfunding: At Cheeky Panda, we used www.crowdfunder.co.uk to help test our products. It was the safest route into business. If demand had been low, then we would have probably mothballed the idea. Thankfully, this didn’t happen and we ended up with hundreds of customers pre-buying the product. This meant we’d created a product consumers wanted. If strangers back your idea, as well as the product, it’s a good validation of your business model.
Incubation: There are a lot of business incubators out there that will help you develop your ideas This particular method is perfectly suited for first time entrepreneurs who don’t have any experience of running a business. You receive coaching and the opportunity to work with other entrepreneurs. However, entry requirements are tough and these incubators demand a lot of equity up front because many businesses fail. This means that those businesses which do succeed require a decent chunk of equity to get payback for the losers.
Angel networks: This is where early stage businesses can pitch to high net worth individuals. Angel investors are often organised collectively and much of it is based on a Seed Enterprise Investment Scheme (SEIS) or an Enterprise Investment Scheme (EIS). Once again, similar to incubation, entry requirements can be high.
Seed and growth equity: This is where you have already shown that the business is making money, and you start attracting the attention of Private Equity. Typically, at this stage, you will have annual revenues of between £500k and £10m. At Cheeky Panda we used Seedrs to implement our initial scale-up.
Debt Investments
Bank or start-up loans: These are normally asset-backed, where the loan is guaranteed against your house. So plenty of risk!
Invoice finance: This is where you have already sold goods but are still waiting to be paid. As a new company you can pay as high as 10% for invoice finance. By the time the business is three years old, this figure may well have dropped to 4%. It will affect your margin and you may lose control of customer relationships.
Trade finance: Hard to secure initially, as it’s generally funded from your own balance sheet. However, it is a useful option once you have assets. And this is because trade finance allows you to receive up to 70% pre-payment on goods for up to three months. This will reduce your working capital requirements.
Conclusion
If you have a solid business and good products, try and find some equity investment to help you create working capital. From here, you can secure debt financing. Crowdfunding is useful if you’re truly confident that your product will sell. But beware. Giving away too much equity early on can be expensive in the long run. When we started Crowdfunding, we limited the amount of money we would raise, because we knew that equity would be worth more in the future.
Every time you secure a new series of investments your profits become diluted and if you give away too much, too early, you can be left with as little as 10% by the time the financial rewards become meaningful. And don’t spend your newly raised capital on vanity items or white elephants, because you may struggle to secure further investment down the line.
The Cheeky Panda is an eco-friendly bamboo household goods company. Chris Forbes founded The Cheeky Panda with wife Julie in 2016, after witnessing bamboo being harvested while on holiday in China. They have built a business that’s now valued at over £50m and is trading in more than 25 countries. The company has made it into the Sunday Times Fast Track 100 list and, for the past three years, been among the UK’s top 100 start-ups.
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