Pros and Cons of different investing routes

When seeking investment for your business, it is crucial to consider both the advantages and disadvantages of each method of investment route. Below we explore what each investment type entails, along with the advantages and disadvantages of each. This includes:

• Debt finance
• Equity finance
• Angel investment 
• Venture capital funding 
• Crowdfunding
• Alternative Platform Finance Scheme
• Private equity financing 
• Stock Market Flotation/Initial Public Offering (IPO)
• Business grants 

Debt finance

Many people are aware of debt financing. It involves borrowing a lump sum which can then be paid back over a period of time, often with interest added on. Mortgages, student loans and car financing are all examples of debt finance that many have already experienced. These loans can be secured or unsecured, but will likely receive a lower interest offer when it is secured against an assets. Debt finance covers:

• Mortgages, including commercial 
• Business loans
• Working capital, this includes overdrafts
• Car financing 
• Student loans 

Equity finance

Equity finance, unlike debt finance, does not require the capital to be returned to the investor over time. Rather, this is a way of raising money from external investors in exchange for a share of the business. This can include:

• Angel investment 
• Venture capital funding 
• Crowdfunding 
• Alternative Platform Finance Scheme 
• Private equity financing 
• Stock Market Flotation/ Initial Public Offering (IPO)
• Business grants

Each of these investment pathways is explored below in more detail, with both their advantages and disadvantages outlined.

Angel investment

This is an investment by someone who puts in their own money into a small business in return for a minority interest, typically between 10% and 25%.

Advantages of angel investment:

• Business angels can make investment decisions swiftly.
• It is usually unnecessary for business owners to put up their own assets as collateral.
• Business owners can gain access to their angel investors’ knowledge and contacts.
• Business owners can expect a business angel to provide mentoring or help with managing the business.
• Because angel investors receive an interest in the business, there are usually no repayments or interest added regarding monies provided.

Disadvantages of angel investment:

• This type of investment is unsuitable for investments under £5,000 and larger investments over £500,000.
• It can be a lengthy process trying to find an angel investor who suits both the business and the sector it sits in.
• Giving away a percentage of the business, and possibly some control, may not suit everyone.
• Business angels tend to provide less formational support.

Venture capital funding

Venture capital companies provide similar investments to that of business angels, but tend to invest larger sums, starting at around £250,000. This makes venture capital investment more suitable for larger businesses.

Advantages of venture capital funding:

• There is a substantial measure of funding available.
• Venture capitalists are open to taking a risk.
• Business owners will receive the benefit of support.
• Business owners will be able to access more opportunities.
• There is the potential to receive additional funding.

Disadvantages of venture capital funding: 

• It can be difficult to obtain approval.
• Business owners will have to give up equity in return for the investment.
• It can be expensive because of share dilution.
• There can be extensive pressure to grow in order to provide a fast return on investment.

Crowdfunding

This concerns many individuals investing, lending, or contributing small sums of money to a business or idea. The money is then added together to help the business owner reach their financial goal. Each ‘backer’ then receives rewards in return.

Advantages of crowdfunding:

• It can be a fast way to raise finance.
• Investors can track progress, which can help to promote the business.
• Unconventional ideas can attract finance that more traditional sources would otherwise refuse.

Disadvantages of crowdfunding:

• Not all businesses or projects comply with crowdfunding platforms criteria, which may make it harder to find one that is suitable.
• Business owners are likely to need to work hard to generate interest sufficient to attract funding on their chosen platform.
• If the funding target is not reached, then funds will need to be returned to the investors.
• Getting funding rewards wrong can lead to business owners giving away too much to investors.

Alternative Platform Finance Scheme

This is a government scheme open to businesses struggling to obtain funding from a bank, where the rejecting bank passes on the business’s details to three alternative finance providers.

Advantages of the Platform Finance Scheme:

• Speed and efficiency compared to high street banks.
• Alternative financiers tend to be specialised providers and will understand the business.
• Alternative providers give tailored options and flexible repayment options.

Disadvantages of the Platform Finance Scheme:

• There can be less regulatory oversight.
• There can be a greater risk of loss.

Private equity financing

Finance is provided in exchange for an equity stake in businesses that have the potential for high growth. It is generally used to back established profitable companies.

Advantages of private equity financing:

• Large amounts of available funding.
• Active involvement from private equity investors.
• The investors have strong personal incentives to ensure the business succeeds.

Disadvantages of private equity financing:

• Dilution of owner’s equity stake.
• Potential loss of management control.
• Variable definitions of the business’s value.

Stock Market Flotation/Initial Public Offering (IPO)

Stock market listings can assist businesses in accessing growth capital and raise finance for development.

Advantages of Stock Market Flotation/Initial Public Offering (IPO):

• Places a value on the business.
• Increases the business’s public profile.
• Allows the business to use quoted shares as currency.
• Makes it easier for initial investors to realise their investment.

Disadvantages of Stock Market Flotation/Initial Public Offering (IPO):

• The cost of floatation can be significant, and there will be ongoing costs to consider.
• Additional responsibilities towards shareholders which may differ from the owner’s objectives.
• Mandatory compliance with wide-ranging regulatory requirements.
• Additional demands on the company’s management team.

Business grants

These are typically funded by the government or relevant organisations and are used to invest in particular projects or to accomplish a certain objective. This source of funding does not use equity as a reward for investment.

Advantages of business grants:

• Generally speaking, the money does not have to be repaid.
• Business owners maintain control of their business.
• There are usually many funding options available.

Disadvantages of business grants:

• Filling out forms and documents to obtain the grant can be extremely time-consuming.
• High level of refusal because competition is so great.
• Business grants are not always renewed, and funding can be cut.
• There are usually strings attached, with many conditions and restrictions.