Entrepreneurship Development 22MBA22

Module: III

Managing and Growing New Venture

Topics to be covered

Preparing for the new venture launch - early management decisions, Managing early growth
of the new venture- new venture expansion strategies and issues. Getting Financing or
Funding for the New Venture: Estimating the financial needs of a new venture and
preparation of a financial plan, Sources of Personal Financing, Preparing to Raise Debt or
Equity Financing, Business Angels, Venture Capital, Initial Public Offering, Commercial
Banks, Other Sources of Debt Financing, Leasing. Forms of business organization: Sole
Proprietorship, Partnership , Limited liability partnership - Joint Stock Companies and
Cooperatives.

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New Venture Expansion strategies and Issues

Expanding a new venture can be a daunting task, but it can also be one of the most rewarding.
However, it’s important to have a solid strategy in place to ensure a successful expansion. In
this blog, we’ll discuss some of the key strategies and issues to consider when expanding
your new venture.

Expansion strategies for a new venture

Starting a new venture can be an exciting and fulfilling experience, but growing that venture
can be even more rewarding. Whether you’re expanding your business into new markets,
launching new products or services, or simply growing your customer base, the process of
expansion can be complex and challenging. In this blog, we’ll explore some of the key
strategies and issues to consider when expanding your new venture.
1. Conduct Market Research
Before expanding, research the target market to ensure there is demand for the
product/service. Look at trends, competitors, and consumer behavior to determine the
feasibility of expansion.
2. Develop a Clear Business Plan
Create a detailed plan outlining the expansion strategy, including objectives, budget, timeline,
and marketing strategy. This will help ensure that all stakeholders are on the same page and
working towards the same goals.
3. Identify the Right Funding Sources
Determine the amount of capital required for expansion and explore various funding options
such as venture capitalists, angel investors, bank loans, crowdfunding, or other sources.
4. Build a Strong Team
Hire and train new staff or develop existing employees to support the expansion. Ensure that
team members have the necessary skills and experience to execute the plan effectively.
5. Leverage Technology
Implement new technologies and tools to streamline processes, improve efficiency, and
enhance the customer experience. This can include automation, software, cloud computing,
or other innovations.
6. Expand Product or Service Offerings
Diversify the product or service offerings to appeal to a broader customer base. This can
involve developing new products or services, improving existing offerings, or entering new
markets.
7. Establish Partnerships and Alliances

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Forge partnerships with complementary businesses to expand the customer base and tap into
new markets. This can include strategic alliances, joint ventures, or other types of
partnerships.
8. Develop a Strong Brand Image
Build a strong brand image to attract and retain customers. This can involve branding efforts
such as advertising, social media, public relations, and other marketing initiatives.
9. Monitor Performance and Adjust Strategies
Track performance metrics and adjust strategies as needed to ensure success. This can
involve monitoring sales, customer feedback, and other indicators of success.
10. Foster a Culture of Innovation
Encourage a culture of innovation and experimentation within the organization to continually
improve products, services, and processes. This can involve providing training, rewards, and
other incentives for innovation.

Key issues to consider while venture expansion

Financial Planning
Expanding your venture can be expensive, and it’s important to have a solid financial plan in
place before you begin. This should include projected expenses, cash flow projections, and a
realistic budget.
Human Resources
Expanding your venture will likely require additional human resources, whether it’s hiring
new employees or retraining existing staff. It’s important to consider how the expansion will
affect your existing team and what additional skills and resources you’ll need to successfully
expand.
Legal and Regulatory Compliance
Expanding your venture may require compliance with new legal and regulatory requirements.
It’s important to understand the legal and regulatory landscape in the new market and to
ensure that you are compliant with all relevant laws and regulations.

Conclusion
Expanding your new venture can be a challenging but rewarding experience. By carefully
considering the strategies and issues outlined in this blog, you can develop a solid plan for
expansion and achieve your goals. Remember to conduct extensive research, seek expert
advice where necessary, and have a clear understanding of your financial and human resource
requirements.

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Forms of business organization

Starting a business involves making many important decisions, especially in terms of

choosing the right form of business structure. Taking enough time to research your options
and understand how each of the major organization structures work may help you make the
best choice for your company.

Sole proprietorship

This popular form of business structure is the easiest to set up. Sole proprietorships have one
owner who makes all of the business decisions, and there is no distinction between the
business and the owner.

Advantages of a sole proprietorship include:

 Total control of the business: As the sole owner of your business, you have full
control of business decisions and spending habits.
 No public disclosure required: Sole proprietorships are not required to file annual
reports or other financial statements with the state or central government.
 Easy tax reporting: Owners don't need to file any special tax forms.
 Low start-up costs: While you may need to register your business and obtain a
business occupancy permit in some places, the costs of maintaining a sole
proprietorship are much less than other business structures.

Disadvantages include:

 Unlimited liability: You are personally responsible for all business debts and
company actions under this business structure.
 Lack of structure: Since you are not required to keep financial statements, there is a
risk of becoming too relaxed when managing your money.
 Difficulty in raising funds: Investors typically favor corporations when lending
money because they know that those businesses have strong financial records and
other forms of security.

Some typical examples of sole proprietorships include the personal businesses of freelancers,
artists, consultants and other self-employed business owners who operate on a solo basis.

Cooperative

A cooperative, or a co-op, is a private business, organization or firm that a group of

individuals owns and runs to meet a common goal. These owners work together to operate
the business, and they share the profits and other benefits. Most of the time, the members or
part-owners of the cooperative also work for the business and use its services.

Advantages of a cooperative include:

 Greater funding options: Cooperatives have access to government-sponsored grant

programs, depending on the type of cooperative.

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 Democratic structure: Members of a cooperative follow the "one member, one vote"
philosophy, meaning that everyone has a say, regardless of their investment in the co-
op.
 Less disruption: Cooperatives allow members to join and leave the business without
disrupting its structure or dissolving it.

Disadvantages include:

 Raising capital: Larger investors may choose to invest in other business structures
that allow them to earn a larger share, as the cooperative structure treats all investors
the same, both large and small.
 Lack of accountability: Cooperatives are more relaxed in terms of structure, so
members who don't fully participate or contribute to the business leave others at a
disadvantage and risk turning other members away.

Many cooperatives exist in the retail, service, production and housing industries. Examples of
businesses operating as cooperatives include credit unions, utility cooperatives, housing
cooperatives and retail stores that sell food and agricultural products.

Limited liability company

The most common form of business structure for small businesses is a limited liability
company, or LLC, which is defined as a separate legal entity and may have an unlimited
amount of owners. They are typically taxed as a sole proprietorship and require insurance in
case of a lawsuit. This form of business is a hybrid of other forms because it has some
characteristics of a corporation as well as a partnership, so its structure is more flexible.

Some advantages of an LLC include:

 Limited liability: As the name states, owners and managers have limited personal
liability for business debts, whereas individuals assume full responsibility in a sole
proprietorship or partnership.
 Pass-through taxation: Owners of LLCs may take advantage of "pass-through"
taxation, which allows them to avoid LLC and corporation taxes, and owners pay
personal taxes on business profits.
 Flexible management: LLCs lack a formal business structure, meaning that their
owners are free to make choices regarding the operation of their businesses.

Some disadvantages include:

 Associated costs: The start-up costs associated with an LLC are more expensive than
setting up a sole proprietorship or partnership, and there are annual fees involved as
well.
 Separate records: Owners of LLCs must take care to keep their personal and
business expenses separate, including any company records, whereas sole
proprietorships are less formal.
 Taxes: In regards to unemployment compensation, owners may have to pay it
themselves.

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Common examples of limited liability companies include start-ups and other small
businesses. Family-owned businesses and companies with a small number of members may
operate as an LLC because it is a flexible business model that allows members to be active or
passive in their roles.

Partnership

Business partnership can be classified as either general or limited. General partnerships allow
both partners to invest in a business with 100% responsibility for any business debts. They
don't require a formal agreement. In comparison, limited partnerships require owners to file
paperwork with the state and compose formal agreements that describe all of the important
details of the partnership, such as who is responsible for certain debts.

Some advantages of partnerships include:

 Easy to establish: Compared to other business structures, partnerships require

minimal paperwork and legal documents to establish.
 Partners can combine expertise: With more than one like-minded individual, there
are more opportunities to increase their collaborative skill set.
 Distributed workload: People in partnerships commonly share responsibilities so
that one person doesn't have to do all the work.

Disadvantages to consider:

 Possibility for disagreements: By having more than one person involved in business
decisions, partners may disagree on some aspects of the operation.
 Difficulty in transferring ownership: Without a formal agreement that explicitly
states processes, a business may come to a halt if partners disagree and choose to end
their partnership.
 Full liability: In a partnership, all members are personally liable for business-related
debts and may be pursued in a lawsuit.

An example of a partnership is a business set up between two or more family members,

friends or colleagues in an industry that supports their skill sets. The partners of a business
typically divide the profits among themselves.

Corporation

A corporation is a business organization that acts as a unique and separate entity from its
shareholders. A corporation pays its own taxes before distributing profits or dividends to
shareholders.

Advantages of corporations include:

 Owners aren't responsible for business debts: In general, the shareholders of a

corporation are not liable for its debts. Instead, shareholders risk their equity.
 Tax exemptions: Corporations can deduct expenses related to company benefits,
including health insurance premiums, wages, taxes, travel, equipment and more.

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 Quick capital through stocks: To raise additional funds for the business,
shareholders may sell shares in the corporation.

Disadvantages include:

 Double taxation for C-corporations: The corporation must pay income tax at the
corporate rate before profits transfer to the shareholders, who must then pay taxes on
an individual level.
 Annual record-keeping requirements: With the exception of an S-corporation, the
corporate business structure involves a substantial amount of paperwork.
 Owners are less involved than managers: When there are several investors with no
clear majority interest, the management team may direct business operations rather
than the owners.

Common examples of corporations include a business organization that possesses a board of

directors and a large company that employs hundreds of people. About half of all
corporations have at least 500 employees.

Sources of Personal Finance

Most businesses will need some form of financing at some time. Financing may be required
at the outset to set up the business and to acquire premises, working capital and stock.
Businesses may need capital to finance expansion or to overcome a difficult period.
There is no “one size fits all” solution to financing as what is appropriate will depend on the
size and nature of the business and on its requirements. The nature of financing options vary
considerably as do the cost of those options. It is vital that the business takes appropriate
professional advice as failure to properly finance the venture may prove disastrous.

Financial Requirements

Before a business can determine the best source of finance, it needs to identify its financial
needs (ie what it needs money for) when it needs that money and how much it needs. To this
end the business should prepare a business plan and a cashflow analysis.
The business plan will not only identify the financial requirements, it will also help in
securing finance as a good business plan will help convince the bank and other investors that
the business is worth backing. The cashflow analysis will identify when and how much any
cash shortfalls will be.
When preparing a business plan and cashflow forecast, consideration should be given to more
than just the start-up costs. It will also be necessary to factor in running costs and living
expenses.
Determining the financial requirements of the business is a prerequisite to obtain the
necessary finance.
Financial planning is an ongoing part of every organisation.
Finance is usually provided one of three ways: grants, debt or equity. Grants are essentially a
donation. With debt the creditor lends money to the business in return for repayment, usually
with interest. With equity the financier takes a share of ownership of the business — if the

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business becomes successful that share increases in value for the financier; however, this can
affect the value of the share of the business that you retain.

Start-up Finance

Most new businesses need cash to get them off the ground. Costs need to be incurred in
providing premises, buying stock, promoting the business, etc, before the business makes its
first sale.
When looking to start up a business, finance is available from a variety of sources:
 using your own money, such as savings or funds derived from remortgaging your own
house
 money from family and friends
 bank loans and overdrafts
 outside investors
 grants and subsidies.

It is important that the business works out how much money is needed and the best source of
finance to meet its needs. Professional advice should be obtained. In many cases, the business
will obtain finance from more than once source.

Other Finance Needs

Once the business is up and running, it may need to raise finance for a number of different
reasons. Finance may be required simply to meet the day-to-day running costs of the
business. It may be required to overcome a short-term financial difficulty, such as the
bankruptcy of a major customer. Finance may be needed to finance the expansion of the
business, to fund a particular project or to cover the cost of new equipment or new premises,
or even the acquisition of another business.
As with start-up financing, money may be available from a wide variety of sources. The
precise funding options available to the business will, however, vary depending on the size
and nature of the business, the reason the money is required and the risk involved.
The business will need to identify the finance required and tailor the financing to meet its
needs. Professional advice should be obtained.

Own Money

Most people use some of their own money when setting up a business. Indeed, unless the
proprietor is prepared to risk his or her own money on the venture it will be very difficult to
obtain external funding.
Personal finance can come from a variety of sources, including:
 savings
 getting a mortgage or remortgaging the home or a second property
 secured loan
 unsecured loan
 selling possessions
 credit card borrowings.

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Careful consideration should be given to the use of personal funds to fund a business and to
the costs of funding a business in this way. For example, the use of credit cards is very
expensive and is not a viable long-term funding option, although this could be used to
overcome a temporary difficulty.
Care should also be taken not to over extend oneself or take risks that one is not happy to
take. While self-financing the business provides a high degree of control, if things do not
work out, it may mean losing the family home.
When self-financing a business, consideration should also be given to the amount of money
needed for day-to-day living costs. Most businesses do not make a profit from the outset and
the proprietor may need an alternative source of finance or income until the business becomes
profitable. This may mean that it is not advisable to sink all one’s savings into the business as
these may be required to live on. Likewise, if funds for the business are raised by
remortgaging the home, there must be sufficient income available to meet the mortgage
repayments. A prudent approach is advisable and you should never underestimate how long it
will take for the business to turn a profit. Furthermore, whilst interest rates are currently low,
it would not be surprising if interest rates rose. Unless the interest rate on a loan is fixed any
rate rise will increase the amount payable and the business must budget for this possibility.
Always have a clear written document setting out on what basis the money is made available,
eg a loan from a director will show in the annual accounts as owing to the directors.

Money from Family and Friends

Where it is not possible to self-finance a business, family and friends may be willing to help.
This should be approached with caution and everyone should understand the risks involved.
That said, finance from family and friends can be an easily available and useful source of
finance. It can also be cheaper than external finance as family and friends may be willing to
offer easy terms, eg interest-free loans, in order to help out.
Where money is made available by family and friends, a written agreement should be drawn
up setting out the terms and conditions on which the money is made available, the terms of
repayment, any interest payable, etc. This is vital so that all parties are clear where they stand
and will help avoid misunderstanding or problems further down the line.
Family and friends may invest in return for a stake of the business. They provide money in
return for shares. If this route is taken, the proprietor must be comfortable with how much of
the business he or she is giving up. To retain control, the proprietor needs a 51% stake.
Again, a written agreement specifying dividend policy and terms and conditions will help
avoid misunderstandings. This is known as a shareholders’ agreement and a solicitor can help
to write it. Where the business is not a company the agreement should state what percentage
of the business is owned by the investor and the share of the profit payable.
Although help from family and friends can be particularly welcome when setting up or
expanding a business, or in alleviating cashflow difficulties, it should be used with caution.
By investing in a business there is a risk that they will lose their money. This can place a
considerable strain on the personal relationships involved. It is not advisable to borrow more
money from family and friends than they can afford to lose and family and friends should not
be put under pressure to supply funding that they are not comfortable to provide.

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Further, for the business to be a success, it must be commercially viable. If it can only survive
on help from family and friends, either in the form of low cost funding or unpaid help,
consideration should be given to whether the venture is a worthwhile venture. If banks and
other outside lenders are not happy to back the business, this should act as a warning sign and
the decision to proceed should not be taken lightly.
You should also consider what is to happen if they should choose to withdraw their
involvement from the business; at some point the family member or friend may need the
money themselves. Many relationships have been strained by one party not being happy with
how the other conducts business. Again, make sure the legal basis for all such contributions is
set out in writing so there is no dispute later with family or friends.

Debt Finance

A business may be funded by debt financing, which is financing by way of loans or other
borrowings. The debt is repaid by making repayments of the amount of capital borrowed.
Interest is charged on the amount of the capital.
Debt financing, such as loans, overdrafts and other borrowings, may be secured or unsecured.
Secured lending is less risky and as a result a lower rate of interest is charged than for
unsecured debt finance.
Debt finance is generally cheaper than equity finance as the owners of the business will not
have to give up a stake in the business, thereby diluting the value for remaining shareholders.
The business will need to service the debt by meeting the repayments. The cost of debt
finance in terms of the interest payable is normally deductible for tax purposes.
Debt financing is usually suitable for funding the purchase of specific assets or to provide
short term flexibility. The needs of the business will determine which type of debt finance is
most suitable.

Loans and Overdrafts

A business may need to borrow money from an external source such as a bank, either to start
the business in the first place, to meet running costs, to finance the purchase of equipment or
premises or to grow the business.
Loans and overdrafts are a popular source of finance.
Overdrafts
An overdraft is a borrowing facility that is attached to a bank account. It is set at an agreed
limit and once the limit has been agreed, it can be drawn on up to that limit as and when
required. Charges within an agreed overdraft limit are considerably more favourable than
those charged for an unauthorised overdraft. It is therefore worthwhile agreeing an overdraft
facility on a business bank account “just in case”.
An overdraft has the advantage of being flexible and the facility can be employed as and
when it is required. An overdraft facility is usually quick and relatively easy to arrange.
It can prove costly, however, if the agreed limit is exceeded and arrangement fees are charged
for varying the terms. An overdraft can be called in by the lender at any time and as such is

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not really suitable for longer-term borrowing needs. If the overdraft is secured on business
assets, the business may risk losing those assets.
Where an overdraft facility is agreed, the business should keep the facility under review to
ensure that it remains the most appropriate forms of financing. It is cheaper to agree an
extension to an overdraft facility in advance than to exceed the limit without prior agreement.
Where the overdraft is in excess of needs, the overdraft facility can be reduced as this will
reduce costs to the business.

Loans
A loan is an advance of money which is repaid over an agreed period. Interest is normally
charged on the loan. Loans may be secured or unsecured.
Loans are available from a variety of sources including high street banks, building societies
and specialised lenders.
Where loan finance is required, care must be taken to ensure that this meets the financial
needs of the business. There will be variations in the repayments period, the interest rate
charged and the security required. The terms offered may be negotiable.
A loan may be arranged to fund the purchase of specific assets such as computers or vehicles
or to provide start-up capital. A loan is suitable where it is possible to identify at the outset
the amount that is required and this is not going to change. The money is then guaranteed for
a certain period and the repayments are set so the business can budget for the loan
repayments. As with other forms of debt finance, the proprietor is not required to sacrifice a
stake in his or her business. An arrangement fee may be payable as part of the cost of
agreeing the loan.
The terms of a loan, however, are less flexible than for an overdraft. The repayments will
need to be made even if the business has a bad month. If the loan is secured, the business may
risk losing business assets if repayments are not made. Renegotiating a loan to change the
repayment amounts, length of the term or extend the amount borrowed will usually incur
additional fees. Small businesses may also find the lender requires the loan to be secured on
their home, if there are no other assets available as security.

Secured loans
The interest charged on a secured loan is generally lower than that charged on an unsecured
loan to reflect the lower risk to the lender. However, the business risks losing the asset on
which the loan is secured if the loan repayments cannot be made.
Most banks and other lenders will require the business to satisfy certain conditions before
offering a secured loan. The business will need to be able to offer acceptable security: a
lender is highly unlikely to lend 100% of the value of the security as it is likely the asset will
lose value when it is purchased and used. Further, the bank will usually want to see a
commitment from the proprietor in terms of providing some of the start-up capital. Mortgages
are a form of secured loan where the asset secured is a property. A floating charge will use as
security any of the stock which the business holds at any one time. The finance provider will
also usually want to see a business plan and cashflow forecast and evidence of contingency
plans for meeting loan repayments in the event of problems. In addition, the bank may look
into the qualifications and experience of the proprietor and his or her previous track record.
Before making a loan, the lender will want to be satisfied that the risk they are taking in
lending the money is an acceptable risk.

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The business should seek to get the best possible terms for the loan and may be able to
negotiate the terms and conditions. There is no reason why a business should not seek quotes
from various providers of finance, but when comparing offers of finance, it is important to
ensure the terms and conditions of the loans are similar.
The terms and conditions will specify not only the repayment terms and interest charged, but
also whether the loan can be repaid early, any penalty charges and fees charged for late
payments. Before agreeing to a loan, the proprietor should ensure that he or she is happy with
all the terms of the loan and understand the implications. It can be wise to take advice from a
solicitor. Some small to medium-sized businesses have been sold complicated interest rate
hedging products they claimed later not to have understood by banks. See the Financial
Conduct Authority website for protections that may be available. It is best to avoid complex
products which you cannot understand.
The loan can be arranged through a financial advisor who will act on behalf of the business.

Guarantees

A new business is a risky lending proposition and banks may be unwilling to lend to a new
business without an established financial record. However, a bank or other lending institution
may be prepared to lend to a new business if someone agrees to act as guarantor. By
guaranteeing the loan, the guarantor agrees to meet the repayments if the business is unable to
do so.
If the business is set up as a limited company, a guarantee can be provided by a director or
someone else involved in running the business. Alternatively, an external business person
may be willing to act as a guarantor. In this situation the business may have to pay the
guarantor a fee for acting as such.
Where the business is set up as a new limited company, the bank will normally require
personal guarantees from directors, major shareholders or both. Care should be taken when
giving guarantees and they should be given only in relation to specific debts or the guarantor
could find him or herself liable for all of the debts of the business. If relying on guarantees
from contacts or family members, have a solicitor draw up the document as they will be
unenforceable unless signed as a deed. Spouses agreeing a fixed charge over their home to
secure a bank loan to the company, one of the most common situations, should each obtain
separate legal advice as the bank will require them to certify that this has happened and that
both fully understand the implications — that they could lose their home.

Enterprise Finance Guarantee Scheme

The British Business Bank’s Enterprise Finance Guarantee Scheme (EFG) provides finance
to smaller businesses in the UK. It aims to allow businesses to gain access to loan finance that
might not otherwise be available to them where the Government will act as the guarantor
under certain circumstances.
Under the terms of the scheme, the participating lenders administer the eligibility criteria and
make the commercial decisions regarding the borrowing. The business plan will normally
need to be viable but the business may lack the security needed by a bank. To overcome the
problems caused by the lack of security, the Government will guarantee 75% of the loan. The
borrower pays a 2% annual guarantee fee to the British Business Bank.

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The EFG scheme is available to sole traders, partnerships or limited companies wishing to
start-up a business or fund expansion. Certain business sectors are excluded from the ambit of
the scheme, eg self-employed artists. Also excluded are businesses with a turnover of more
than £41 million and businesses with sufficient assets to offer as security for a conventional
bank loan.
The loan application is made to the businesses bank, which submits it to BEIS. BEIS makes
the decision as to whether to approve or decline the loan.
EFG guarantees loans to fund the future growth or expansion of a business, from £1,000 to
£1.2 million. Finance terms are from three months up to 10 years for term loans and asset
finance and up to three years for revolving facilities and invoice finance.
The loans are not as cheap as conventional bank loans, reflecting the additional risk. Interest
is charged at the rate the lender decides. In addition, BEIS charges a premium of 2% for
taking the risk.
The business can agree the loan for the maximum possible amount. It does not, however,
need to take up the whole agreed amount. The loan can be taken in 25% instalments. Further
details are available here. This replaced the earlier Small Firms Loan Guarantee Scheme. The
EFG has been extended to 2021, but may be extended further.

Equity Finance

Equity finance is an alternative to debt finance as a method for raising funds for a business.
Capital is obtained from investors in return for a share of the business. This can be structured
in a number of ways, the most common of which is by selling shares. This will normally
entitle the investor to a share of profits, usually paid out as dividends, and also a share of the
assets of the business should it be wound up. Equity investors may also have an element of
control over the business.
Unlike debt finance, there are no ongoing repayments associated with equity finance.
However, the owners of the business have to give up a share of the business and a share of
future profits. Raising equity finance should not be used as a short-term fix if the owners do
not wish to relinquish a stake in the business. To retain overall controls, the owners must
maintain at least a 51% stake.
In raising equity finance, it is essential to be realistic about the value of the business. If a
business wishes to raise £200,000 and is only prepared to give away 20% of the business, the
business must be worth at least £1 million for this to be a viable proposition (20% of £1m =
£200,000).
Equity investors do not have rights to interest or to be repaid at a particular date. They are
effectively gambling on the future success of the business. For this reason, equity finance is
also known as risk finance. Equity investors will normally expect a higher potential return to
reflect this level of risk.
Equity finance is used in preference to debt finance when the nature of the business is such
that it is not an attractive lending proposition, eg due to the high risk involved or lack of
security or because the business does not have sufficient funds to service a loan because it
needs money to run the business or finance growth.

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External equity investment may be provided by venture capitalists or business angels. The
most appropriate source of equity finance will depend on the needs of the business.

Business Angels

Business angels are wealthy individuals who invest in high growth businesses in return for
equity. They typically invest in the early years or high growth phases of a business.
Business angels may invest either alone or as part of a network, syndicate or investment club.
A particular advantage of business angels is that they may make their own skills, experience
and contacts available to the company. This can be invaluable to a new business. Business
angels often support local businesses and can also bring local knowledge to the table. Again,
this can be very beneficial. They may focus on a particular business sector in which they have
expertise.
Business angels typically invest between £10,000 and £250,000. Most initial investments are
less than £75,000. They also look for the potential for high return and are generally not risk
adverse.
Although it will still be necessary to prepare a comprehensive business plan, business angels
are often in a position to make a decision quickly without the need for a long drawn-out
approvals process.
However, business angels only make a limited number of investments and it may be difficult
to find a business angel willing to invest. The British Business Angels Association can
provide help and advice in finding a suitable angel and securing equity finance in this way.
The British Business Bank provides support through the Angel CoFund scheme. This invests
alongside other business angels to support businesses with strong growth potential. It will
provide equity investments of between £100,000 and £1 million. The investment is subject to
an upper limit of 49% of an investment round and 30% of the equity of a business.

Crowdfunding

The internet has led to new ways for businesses to raise capital from investors. One example
is “crowdfunding”. In March 2014 the Financial Conduct Authority agreed new rules to cover
the increasingly popular crowdfunding offered by companies such
as Seedrs, Kickstarter and Crowdcube.
The FCA announced: “The rules on loan-based crowdfunding focus on ensuring that
consumers interested in lending to individuals or businesses have access to clear information,
which allows them to assess the risk and to understand who will ultimately borrow the
money. The rules also require firms running the loan-based platforms to have plans in place
so that loan repayments continue to be collected even if the online platform gets into
difficulties. Also, new prudential regulations will be introduced over time so that these firms
have capital to help withstand financial shocks. This is important as consumers who lend
money through these firms will not be able to claim through the Financial Services
Compensation Scheme.”
Some of the funding is not loan based but security based. In relation to this the FCA’s
approach to security-based crowdfunding allows anyone to invest up to 10% of their
available assets, while those who take advice or have the relevant knowledge and experience

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can invest more. The security-based crowdfunding rules also apply to equity and debt
securities such as mini-bonds, which are difficult to cash in, the FCA said in 2014. The rules
provide the same level of protection to investors whether they engage with firms online or
offline as a result of the direct marketing or telephone selling.

Venture Capital

Venture capitalists invest large sums of money in a business in return for shares. For this
reason, they are less suited to providing funds for a small or start-up business.
The minimum investment for a venture capitalist is around £2 million, although regional
venture capital organisations may consider smaller investments. A venture capitalist would be
looking for an ambitious but realistic business plan and for the business to have a unique
selling point. A high potential return in return for the risk is sought.
Venture capitalists, unlike business angels, do not get involved in the running of the business.
For this reason they would be looking for a proven track record and proven management
expertise. This means that venture capital is not suitable for start-up business.
Obtaining funding from a venture capital organisation is generally a more complicated and
involved process than using a business angel. Professional help is a must.
There are various venture capital organisations, including the British Venture Capital
Association, who can provide help and advice on venture capital investment.

Enterprise Capital Funds

A business may require more funding than can be provided by a business angel but the
funding need is too small to be considered by a venture capital organisation. This gap is
known as the equity gap.
The Government introduced Enterprise Capital Funds (ECFs) in July 2005 in a bid to bridge
this gap. The ECFs scheme provided funds to match that provided by business angels or
venture capitalists. SMEs with high-growth potential will be able to apply for up to £2
million of equity finance from new SME-approved enterprise capital funds. This is now part
of British Business Bank, a Government owned entity — see the ECF website.

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