When you want to raise finance, you have four options:
- You provide the capital yourself
- You borrow the money (debt)
- You get an investor (equity)
- You get a grant
Your own resources
If you put your own money into your business (and you MUST – if you won’t, who else will!), recognise that this investment will be at risk. If your business fails, you will lose your money.
Nonetheless, it is important that you raise as much as you can from your own resources, since most financiers and grant agencies work on a ‘matching funds’ basis – that is, they will invest no more than you are investing.
If you need external funding, to supplement your own contribution, note that it is unusual to secure 100% funding from any single source.
Because equity means giving away part of your business, it’s in your interest to minimise the amount held by outside investors. However, be sensible – it’s better to own 70% (or even 30%) of a thriving and profitable business than 100% of a business going nowhere because it’s starved for funds.
The best source of small-scale equity capital for most start-ups continues to be family or friends. If you do decide to involve family and friends as investors in your business, make sure both sides know – and agree on – the ground rules:
- Their investment is ‘risk capital’ – it may be lost and is not repayable (unless you agree otherwise)
- Equity investment does not automatically give a right to management involvement – even if it’s clear that you cannot cope
- Their investment may be diluted by other later investors, whose money is needed to continue the development of the business
Put everything in writing – in a formal shareholders’ agreement, if appropriate, or a simple letter of understanding signed by all parties.
For many craft and design businesses, the option of raising equity capital is not a reality. Either the amount you need is too small to interest an investor, or the level of return, while adequate to pay interest on a bank loan, is not sufficient to tempt the investor who is exposed to a greater risk. Most equity investors look to invest at least €250,000 in a company, arguing that amounts below this do not justify the amount of checking necessary.
Because you have to pay interest on debt, you should try to manage with as little as possible. However, few businesses get off the ground without some debt. The issues are usually:
- What is the cheapest form of debt?
- How can you sensibly reduce the amount of borrowing required?
- To what extent must borrowing be backed by personal assets or guarantees?
Before you mortgage your family home as security for a business loan, take professional advice from your solicitor. And, where possible, avoid giving a personal guarantee for a business loan. It is what it says: a personal guarantee – that means if your business cannot repay the loan, you have committed to doing so yourself.
As regards grants, remember that you have no entitlement to grant-aid. Yes, you must meet the conditions – if you don’t, the agency cannot fund you – but meeting the conditions alone is often not sufficient, since there is vigorous competition from other start-ups and small businesses for limited funding. Use your business plan to make you and your business stand out from the crowd.
Internationally-traded services are one of the key areas for funding support and enterprise development. If your craft and design business exports products or has the potential to do so, it will have access to more funding options.
Alternative sources of funding
Alternative funding options are emerging in the areas of micro financing, crowdfunding and angel equity investing.