I am struggling to raise £20,000 for my start-up plumbing business. What options are there for me in regard to alternative finance?
Funding of £20,000 is a relatively small amount in terms of capital and it could be argued that you would be best to try and borrow this from friends and family. However working on the basis that this isn’t an option, the main question to ask is whether the funds should be raised against debt or equity – for a number of reasons, debt is favourable in situations like this.
Assuming you have little cash to invest in the project, using equity funding, you would risk having to hand over the bulk of your business from day one and consequently lose control and direction. If the bulk of the capital is to be spent on assets, debt investors would have a degree of confidence that should the business fail, at least part of their funds may be recoverable.
If the business proves successful, the debt may be bought out at a fixed price at some point in the future, whereas buying back equity would potentially be very costly.
The concept of crowdfunding is becoming increasingly mainstream, with one UK firm in particular – Seedrs – now in the process of becoming regulated by the FSA. Although their charging structure – 7.5 per cent subject to you raising all the capital you want – may prove costly for larger funding rounds, for someone looking for £20,000 a cost of £1500 applies.
It is highly unlikely such amount would allow the firm to independently market their proposal and prepare legal document for less than £1,500. Crowdfunding firms, such as this, will also provide relevant templates for the paperwork required – whether this completely removes the need for legal advice is perhaps debatable but it should certainly assist in keeping costs low.
Do note the FSA has raised concerns about crowdfunding and this should be borne in mind before entering any such arrangement.
See also: Grand plan could win £10,000