Adam Brodie’s Funding Round Checklist #0 – Considering Alternative Funding Options

Advice and Fundraising

March 2, 2020

Raising enough funding to support growth is arguably the main struggle of each Founder, but there are alternatives to giving up equity when raising finance.

There’s a big difference between running a business and growing a business. Growing a business, especially if you want to do it quickly, requires extra effort and funding on many sides: operations, HR, strategy, marketing and last, but certainly not least – cash flow.

Fueling the growth of a company – which for a scale-up could mean scaling the volume of business by over 10 times annually for multiple years in a row – requires investment. If your company is bringing a product to market you will certainly have to invest in your supply-chain and production process. If you are delivering a service, then your staff, platform and systems will require investment. Raising enough money to support this growth is arguably the main struggle of each Founder.

Founders reportedly spend a third of their time trying to raise finance. Despite that, poor cash-flow is the main reason for start-up failure. From whichever way you look at it, to grow a successful business you need to come up with a way of raising a sufficient amount of funding without burning it too quickly.

In recent years the start-up ecosystem configured itself around a Venture Capital model based on Funding Rounds. That’s where founders at different stages approach investors and try to get them to invest in their company in exchange for equity. But you already know that!

What many Founders do not realise is that there are always alternative ways to obtain finance that do not involve giving away equity. As a Founder, you should never underestimate how precious your equity is. Your company might be worth billions in a few years, and that’s a good reason for investors to buy into your vision as much as it is for you to be reluctant to give up shares too easily.

While the following chapters of this guide are about preparing for an Equity Funding Round with Angels Investors and VCs, here we will look at alternative ways of financing the growth of your company that do not involve diluting your ownership of your company.

Operating Cash Flow

This is the cheapest source of financing. Sure, it is not always applicable as it already requires getting to a stage where you are able to make a revenue. Even then, your profit margins might not be enough to cover the cost of an accelerated growth.

Either way, a healthy cash flow can be nothing but good for your business. More than that, it’ll look good to investors when you are presenting your financial data, so it’s a win-win! My advice on how to improve your Operating Cash Flow may sound obvious: get customers to pay sooner.

Configure your business model and pricing in order to incentivise your customers to pay in advance for your products and services. If you’re selling a product, this might translate into pre-sale or if you’re running a SaaS business, discounts on pre-paid long-term subscriptions.

Especially if you are running a B2C company, a crowdfunding campaign might be exactly what you need. Through platforms like Kickstarter and Indiegogo you can “pre-sell” your product and services in order to fund their development and production with revenue before actually providing them to customers.

Depending on the size and timing of your payments, you might also benefit from invoice discounting. This is when a business that will pay 98% of your outstanding invoices as soon as they are issued, and then collect the full amount from your customers whenever they pay.

Grants

UK Research & Innovation provide grants to innovative business that are disrupting their own industry. Innovate UK grants are particularly generous, sometimes over £1m in value.

These grants are reimbursed quarterly in arrears, and they usually cover up to 70% of qualifying spend. If you are growing an innovative business, then you definitely shouldn’t miss the chance to minimise your expenses with an Innovate UK grant.

Always keep an eye on the Innovate UK website and apply to competitions whenever you are eligible.

Receiving a grant is also a good source of publicity. In some cases it acts as a “quality mark” for investors and improves their perception of your innovative business.

The only “catch” of grants is that they potentially interfere with your eligibility for R&D Tax Credits, so make sure to seek guidance if you are planning on using both.

R&D Tax Credits

The UK Government will help you finance your R&D investment if you are carrying out innovative research (i.e. you are contributing to advancement in your field). Thanks to R&D Credits you can get up to 33% of your R&D spend as cash-back if you are loss-making, and up to 46% as a tax relief if you are profitable.

The average UK cash-back is £45k. Many of our clients are able to secure far higher claims. If your activities are within the scope of the HMRC definition of innovation, then you should definitely claim R&D Tax Credits. They might be crucial as a way to keep fostering your company’s growth. R&D Claims are available annually in arrears, about four weeks after you submit your annual accounts and corporation tax returns.

Debt

Taking out a Bank loan is always an option in order to raise finance without diluting ownership. However, as a newly incorporated business, it might be hard to obtain significant credit without a credit history.

I always advise keeping business and personal finances separate, and so I don’t advise entering into agreements with personal guarantees. 

The UK Government’s Start-Up Loan Scheme can be an optimal solution for pre-seed and seed stage businesses. You can borrow up to £25k per director – with a total maximum of £100k. It does not involve personal guarantees and the business has to repay the loan over 4 years at 6% per annum. However, be aware that if the business fails, the loan is repayable by the individual directors from their future income, similarly to how student loans work.

Ignition Financial partner Swoop is specialised in matching companies with the most suitable funding options, including grants, loans and funds specific to certain sectors. It’s as easy as creating a free account through this link. Give it a go!

Revenue-Based Financing

Revenue-based financing does exactly what it says on the tin: it allows you to raise finance and to pay it back as a percentage of your future revenues. Revenue-based financiers are essentially lenders, so they tend to require a personal guarantee in order to secure the funding.

However, a new category of revenue-based financiers is emerging that aim to provide fast funding with no equity or guarantees involved, harnessing the power of data to assess a company’s performance and determine whether or not they are eligible for the loan. The loan, however, does not involve compounding interest but, in most cases, just a flat fee.

At the time of writing, the category leader in Europe is Ignition Financial partner Uncapped, which provides funding up to £1m to contribution-margin-positive companies that are already bringing in substantial revenues. This could be an ideal solution for tech-enabled companies such as e-commerce businesses or SaaS ventures that are looking for growth capital to spend on marketing and grow their user base.

Director’s Loan

Using your own personal funds can be an effective solution to get you to the next valuation point. Injecting your own cash into the business can help you reduce dilution before an Equity Funding Round, while also improving your company valuation by being able to raise more for less shares.

Interested in Funding Rounds?

Speak to Adam Brodie

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