This is the next instalment of a series of blog posts I’m writing about how and why you need to get some extra cash into your business, so that it can grow and flourish as a grown up business.

Image by bubbo.etsy.com

Today, I’m going to look at how to bring angel investment into the business. This is an equity investment, where you give shares to someone else in return for a wedge of cash which you then to use to grow the business. The central idea is the same – although you own a smaller share of the business, that share of the grown up business is worth much more than if you still owned 100% of a little business.

Often you’ll find that someone you know already is happy to put in 10-50k, maybe more, in return for a share of your business. This might be someone in your family, a friend, a customer, or another business person you know through networking. It’s worth asking around, even putting it on your website so that people know that you’re interested. 40% of angel investments come from people who already know the business owner.

If you don’t have any luck that way, you might try one of the organisations which broker angel investment. I’ve worked with clients who have had success through Angel’s Den and Finance South East, both of whom have courted groups of angels, and will sell the idea of investing in your business for you. Be aware though, that this is only really worth doing if you need more than 50k, as by the time that you’ve paid the broker fee, and the lawyers, you’ll have probably spent about 10k.

These are some of the areas I look at when I’m working with clients on bringing in angel investment:

• A clear business plan which shows how the investor will get back at least 3 times their initial investment.
• The recent growth of the business – don’t allow the process of seeking investment to slow down your organic expansion, as you can make a much stronger case to an investor if your business is already growing.
• Suggesting a mix of angel investment and bank finance – an investor will be much happier to invest if a bank has said they’ll lend half the money. Everyone likes to share the risk and back a horse which other people are betting on
• I’ve also been able to introduce clients directly to investors, because I’m constantly networking to find opportunities for my clients, so I have my nose to the ground with right people.

I’ve also looked at how you can persuade the banks to lend you money next time, so make sure you don’t miss out by subscribing. If your business wants to grow and you know that you need some money to develop, do feel free to get in touch for a chat about how I might be able to help.

Other articles of interest about shares and equity in your business are:

How Can I Make My Company Eligible For EIS?

How to give away shares in your business

Getting someone to invest in your business

Giving shares and equity away

One of the major doom and gloom statistics reported in the news is that banks are lending less and, in particular, are lending less to smaller businesses.

Photo by Lucy Hill

I checked some of the figures out at the Bank of England’s website, and they say that banks have lent 4% less money this year than they did last year. But then I thought, hold on a minute, that’s 4% less than last year – 4% isn’t that much, is it? And then I delved a little deeper into the Bank of England figures, to find that they think that banks are lending, albeit less than a few years ago, and that although they say the availability of credit for small businesses is “variable”, the banks are lending to some small businesses.

Which fits with what I’m seeing with the companies I’m working with – there is money available, but the banks are being very choosy about who they lend to.

So much for the doom and gloom: how do we get some of that bank finance into your business?

You have two options here. You can either borrow personally and put that into the business, or you can get the business to borrow the money directly.

When and why is personal borrowing a good idea?

You might want to borrow the money yourself if you can get a better interest rate through remortgaging your house. Mortgage rates are 2-4%, whereas business loans are 9-12.5%. However, remortgaging is a hassle, so this is only worthwhile if you need upwards of 10k. Even a personal loan (rather than a mortgage) will often be less time consuming and at a better interest rate than a commercial loan to the business.

If you need less than 10k, say to pay for some business advice, a rebrand and a new website, you’d probably be better off getting a 0% credit card, and making sure that you pay it off before the 0% bit turns into 26%.

Remember that if you borrow personally, you’ll have to pay it back yourself if anything goes wrong, so you’re taking the liability yourself, not the business.

Getting the company to borrow the money

If you want to limit the potential liability to yourself, or if you don’t have enough equity in your house to remortgage, and you need more than 10k for the business, you’ll probably want to get the business to borrow the money. I’m assuming that you’re a limited company here, by the way – if you’re a sole trader or a partnership and you borrow the money, it’s exactly the same as borrowing the money yourself.

In this case, you’ll want a commercial loan. Here are some tips to help you get the bank to lend you money:

• Banks like you if you’ve been going for a few years, and you have been producing profits for a while. Their rule of thumb is that they’ll lend you 3 times your net profit, plus the director’s drawings.
• Banks will want to see a good (but brief) business plan, with a clear focus on how you’ll be able to pay back the money you want to borrow. Remember that the banks want to lend you money, as long as they are confident that they’ll get it back, because that’s how they make their giant profits.
• Do be prepared to offer a personal guarantee. They’ll definitely ask for it, and if they don’t ask at the beginning, they’ll sneak it in later.
• Banks will also ask you for security. Remember, they want to be absolutely certain that they’ll get their money back, so they’ll ask you to back it with a second charge on your house. Providing security makes it more likely that you’ll get the loan, but you have to think carefully about the increased risk to you.
• If you can get someone else to put some money in, or you can put some in yourself, this will make the bank more likely to lend to you.
• Banks prefer it if you’re buying things. They would prefer you to borrow to buy a new truck than a website, even if the website is going to generate lots of new business for you. Old fashioned and ludicrous, but that’s the way it works.
• Go to lots of banks, not just the one you have your current account with.

If you don’t have any assets for security, consider the Enterprise Finance Guarantee, where the government will guarantee 75% of the loan, which makes the banks more likely to lend to you. They’ll still ask for a personal guarantee, and EFG loans are more expensive, but it’s definitely an option.

This article is one of a series on how to get money into your business so before you run off and borrow money, check out my guide to the organic cashflow model (which I always prefer to borrowing) and subscribe to the series to make sure you get all the instalments.  And of course, if you need some help with getting money into your business, do get in touch for a chat to see how I can help you.

Lots of businesses grow very slowly. Or don’t grow at all. They do the same as they did last year, maybe producing a nice little income that they’ve got used to. I’m not really interested in those businesses, even though they’re probably doing lovely things.

Photo by S Falkow

I’m interested in the businesses who want to expand and grow. The people who are ambitious, who want to do new things, the business owners who want to see a real difference in their company, and the people who want to make some real money for a change.

These are the people I work with at the Joy of Business. They’re not power mad, money grabbing uber-capitalists; they’re business owners just like you, and they have taken a decision to have a “grown up” business and want to create something bigger and better than they have at the moment.

Often, but not always, you need some extra cash to grow your business. You might need to employ someone else to do some or all of the work while you concentrate on a new area of the business or spend your time on sales and marketing. So you need some extra money to make sure you can pay that person.

Maybe you need to rebrand the business, and start taking your marketing seriously. You need to commission a new look, a website which attracts customers, and some copy which explains why someone should buy from you.

Sometimes you can see a very profitable potential area of your business which you’re not currently making the most of. You need to spend some cash to develop something new, which is going to be your killer app – the one that will revolutionise your business. I see lots of businesses where the business owners have seen an opportunity, but haven’t had the time to develop this.

All of these situations boil down to the fact that you don’t have any surplus in the business. Either you don’t have the cash to commission a new website, or you’re so busy chasing the jobs which are going to pay the bills right now that you don’t have time to do the things which are going to pay off your mortgage in 3 years time.

How to lose half a million quid

I had a service business client 5 years ago. They’d identified a software product they could make which I guessed would sell about 100k per year, if not more. It was hot. They’d done about 80% of the coding, but it needed finishing off. At every meeting, I asked them how the product development was coming along. Every time, the reply was that they hadn’t had time to work on it, because their software developer was doing client work.

I bumped into the director a few weeks ago and he told me that they were finally almost ready to launch the product. I was happy for him, but thought of the money they’d lost in the meantime. 5 years at 100k pa, they’d lost half a million, most of which would have been pure profit. And then I Googled the type of product, and saw at least 10 different competitors, none of whom had been there when they had first thought of this product. So now they’re competing with all these other companies, and they’ve sacrificed about .5m of income. They probably made about 30k on the client work their developer was doing.

Don’t let this happen to you

Don’t let this happen to you. If you have a plan, or even just the desire to grow your business, and the lack of cash is holding you back, you can find the cash. Over the next couple of weeks I’ll be looking at different options for getting money into your business, whether it’s 3k for a website revamp, 10k for a temporary software developer or 100k to develop a new business area.

It’s possible – and it’s up to you. Of course, if you’d like some help with it, or a reality check to see if it is possible – get in touch for a chat

When I see a business which needs some money to do new things, the first thing I’ll consider is the organic cash flow model. This is where you expand the company using money which is already coming into the business, or increase the amount of money coming into the business in order to pay for the expansion.

Photo by Bashed

For example, if you need to take on a new member of staff, I would work out how much that person is going to cost. Roughly, I’d advise that you have 3 months of salary + NI + the cost of their desk space, computer etc in the bank as a cushion before you take someone on. Some people prefer 6 months as a rule of thumb for a little more security, or if it’s going to take a bit longer for the new person to help you to earn more money. We’d then look at how your business could afford to do this.

But I don’t have enough turnover

Many of my business advice clients want to take on a new member of staff, or improve their website, but believe that they don’t have enough money coming in to finance it.  They have been waiting until they have enough cash to be able to afford it, but a lot of businesses seem to get stuck at a certain level of turnover.

And if you decide that you’ll wait until magically you can afford that new person, you’ll always be waiting.

You need an artificial way to raise your ceiling, so that you can get enough money to get the new person, or afford the rebrand, or take time out from selling services to develop your new project.

How to raise your ceiling

There are two ways to get the extra money you need. Firstly, you can cut back on how much money you take out of the business. Do you really need that extra latte? Maybe you don’t need to buy those new shoes right now. Can you get a better deal on your mortgage? These are all good things to check anyway, just for the sake of your financial health. If this sounds like an area you could do with thinking through, speak to Simonne Gnessen, who is extremely skilled at helping you negotiate the personal financial minefields.

Secondly, you can decide to increase your turnover in the short term. Can you put up your prices a little? I bet you haven’t increased your rates since you first heard the words “credit” and “crunch” put together in a sentence. Can you squeeze another couple of customers in? Can you be slightly more assertive in your marketing, or go to a few more networking events, so there’s a little more money coming in each month?

Targets

If you apply this to your own business, you can set a target for the extra money you need. Maybe you’re a techie type company and you want to move away from developing websites for clients and towards your own online products. Identify how much money you would need to step away (or partly step away) from client work for a few months, and work towards this.

I highly recommend putting the extra money into a separate savings account, preferably on a standing order each month. Although you’ve still got exactly the same amount of money, splitting it between two accounts means that you’re more likely to save it up, whereas if you leave it in the regular business account, somehow it’s more likely to disappear.

Key points

This is a fairly long post, so I’ll sum up the main things to remember:

• Decide what’s going to make your business zoom in the future
• Work out how much money you’ll need to do this, both as a one off cost (e.g. new website) and as an ongoing cost (e.g. staff salaries, ongoing marketing costs)
• Set a target to save up
• Work out how to save up the extra – reduce spending and bring more in
• Put the money away so you don’t get used to it

Applying this to your business

If you are serious about having a grown up business, and recognise that you need to bring some money in to do this, watch out for the other posts I’m going to be writing soon about other ways of getting cash into your business to fuel growth. I’d advise subscribing so you don’t miss anything.

And if you can’t wait, or if you’d like to talk through the implications for your business, do feel free to get in touch and see if I can help you to make all this into reality.

I’ve been doing quite a lot of work recently for clients who want to get some investment into their companies, and the question of EIS (the Enterprise Investment Scheme) has come up with a couple of people, so I thought I’d share some practical advice with you.

This article is quite a specific how to do things one, so if you’re not interested in getting funding for your business, you’d probably be better off reading something more interesting such as How to spot a gap in the market or Key Success Factors.

If you are thinking about bringing in angel investment, this will be fascinating. Promise.

EIS – what is it, and why is it important?

EIS is a government scheme that is actually useful for small businesses. Now, that it in itself is unusual enough to make it interesting, but enough of the politics.

Imagine you’ve got yourself an angel investor who’s going to give you a nice cheque for 100k so you can employ staff, develop your product, and generally do all the cool marketing things which are going to bring in lots of customers.

EIS means that as soon as the angel investor writes you a cheque, they get a cheque back from the government for 30% of that amount. So you get 100k, and they get 30k immediately. And when you sell the company for a million pounds, the investor doesn’t have to pay any capital gains tax. Brilliant!

Is there a catch?

Of course, there are a few more details to it than this, so the investor has to have actually paid the 30k in income tax that year, as HMRC don’t like to give away money with one hand unless they’ve taken it with the other beforehand. Here’s all the boring bits from HMRC.

Would my business be eligible?

You can get the Revenue to tell you beforehand if you are, by filling out a form (EIS Advance Assurance) but most of the small businesses I help to raise investment could make themselves much more attractive to angel investors by saying that they are eligible for EIS. So that probably means that you could too.

More articles on fundraising and investment

If you’re interested in getting angel investment or other juicy chunks of cash into your company, I’d recommend three things:
First, have a look at some of the other articles I’ve written on this area:

• Getting someone to invest in your company
• Why you need a woman on board

Second, sign up to my email newsletter, because I have lots of exciting things to say about how to grow and develop your business, including investment advice.

And third, if you buy me a coffee, I’ll give you some advice on whether this is a good route for your company, and tell you if I can help.

Julia Chanteray