Choose the right finance when starting up

You might want to bring in outside investors. If the business does well, they share in the profits - but if the business fails, they lose their money.

Typically, your company issues ordinary shares (standard shares with no special rights or restrictions) to investors in return for their capital.

Outside investment can suit promising businesses that do not expect to produce a lot of spare cash in the short term but offer the potential of greater returns over the longer term.

Advantages

• Attractive for businesses looking to bring in additional expertise as well as funding.
• Unlike loans and overdrafts, you do not normally have to make payments to investors until the business can afford them.
• Increasing the capital invested in the business makes it easier to borrow from the bank.

Disadvantages

• Your share of the business, and of its profits, will be lower.
• Investors may want control over how you manage the business.
• Investors may want the business structured in a way that makes it easier to sell their shares in the future.

Sources of investment

There are different sources of investment:

• individuals, such as friends and business contacts
• business angels
• investment funds and venture capitalists for larger investments

Business angels

Business angels are wealthy individuals who typically invest £10,000 upwards and who may also offer business expertise.

Venture capitalists usually invest more than £2 million in businesses where they believe they will receive a high return on their investment by exiting (selling their investment) at a certain time.

Before you approach potential investors

Before approaching potential investors you need a good business plan, including evidence of your management ability.

Your plan should:

• include detailed financial forecasts
• demonstrate what you will do with funds invested in the business

You will also need to prepare a pitch, which will sell your business to potential investors.