Funding your start up

We spoke to three new players in the market: borro.com, MarketInvoice and Funding Circle – along with companies that have used each service to raise finance – to find out how each model works, what it costs, and crucially, how viable it is for a start-up business.

borro.com: Borrowing against assets

Founded three years ago by Paul Aitken, borro.com advances cash against valuable personal assets, such as jewellery, fine wines and classic cars. Essentially, the company is a business-friendly variation on the age-old pawn shop model. In order to access cash, you agree a value for your car or rings, and hand the items over to the provider. They can be retrieved once the loan has been paid off.

According to founder Paul Aitken, it’s a lending model that is ideal for businesses that need rapid access to cash to pursue an opportunity or pay a bill. If you need £10,000 to buy stock, kit out a retail space or even pay the taxman, borro provides a means to get the money within the space of a few days.

One reason borro can advance cash so quickly is that there is no need for lengthy credit checks or examination of your business plan and accounts. Put bluntly, borro doesn’t need to know anything about your business as its investment is secured against the assets that will sit in its storage facilities until the loan is repaid.

Businessman Terry Voce, founder of A&T Food Services, confirms the rapidity of the Borro model. Needing cash to start his business, he raised £12,000 against watches, gold, diamond and silver within 24 hours of applying. “There was none of the hassle I would have experienced if I had gone ahead and applied for a bank loan,” he says.

Meanwhile, the sums raised can be substantial. “The average loan value is about £4,000,” says Aitken. “But we can go as high as £1m.”

Here’s how it works: Borrowers can approach borro either through the website or via a financial adviser. The first step is a 10 or 15-minute conversation, during which borro will discuss the available assets and assess whether it will be possible to provide a loan.

The next step is valuation. “Let’s say it’s a classic car,” says Aitken. “We will collect it and value it and make a loan offer.” Interest rates are set at 2.49% per month and the average borrowing period is four to five months. There is no requirement to repay any percentage of the loan before the end of the agreed period, although customers can make the payment early without incurring penalty charges.

However, Aitken stresses that borro is ideal for businesses that need a short term cash injection. “It’s not for long-term finance,” he says. “If you need money over the long-term you need finance that’s appropriate for that.”

MarketInvoice: Using debtors as collateral

One of the biggest challenges facing new businesses lies in managing the yawning gap between the sending of an invoice to a customer and the receipt of payment. Depending on the terms of the agreement – which are often dictated by the customer – the period between bill and payment could be anything from a few weeks to several months, and during this time you’ll have to pay bills and wages. It can be a long wait.

And also a real financial problem. Unless you have sufficient cash in the bank, you can find that your business will simply run out of money, even though you’ve got plenty of customers. As such, many businesses rely on bank finance to ensure they have enough ‘working capital’. The traditional financial tools for this purpose are overdrafts and ‘invoice finance’, which enables you to borrow against the value of invoices once they are sent to customers.

However, in the current climate banks and specialist invoice finance providers won’t necessarily lend to start-ups and very young businesses. And those that will tend to limit their offer to factoring arrangements, which will mean the lender collects all the debts from customers on your behalf.  Handing over debt collection to a third party isn’t always comfortable and in addition, most factors will require you to sign up for a specified period (locking you in to fees and charges) while also putting a limit on credit.

MarketInvoice offers a flexible alternative. The company operates as an online marketplace, bringing together investors who lend money with businesses in need of finance. It’s a variation on the invoice finance model, but in this case a company can pitch for funding on individual invoices. Thus, if your business has secured an order worth £20,000, you can present that to investors on the market and raise cash against it. You use the system when you need it, collect your own debts – thus maintaining a relationship with the customer – and you’re not locked in. “And because we have multiple investors, businesses can get the best rates,” insists founder Anil Stocker.

There is a one-off vetting process. MarketInvoice will ask to see company accounts and a debtor ledger but if everything checks out, you can be using the marketplace within 48 hours. Once you are, you’re into a bidding process. The company specifies the percentage of the invoice value required and a minimum and maximum fee (say 1.5% to 2.5%) that it is prepared to offer to investors.

The company can also specifiy a fee level that it will automatically accept. Bids flow and the company chooses the best rate. MarketInvoice takes an additional 0.5% fee. The finance available is dictated by the size of the invoice, and cash is repayable once the invoice is honoured.

According to Joseph Miles, it’s a system that can be particularly useful for businesses that are growing rapidly. As MD of social media marketing company XI Backoffice, he found that as his business expanded, the cost associated with providing services for an ever-growing client list were not covered by revenues earned in previous months when turnover had been lower.

The banks, he says, were not helpful as they based their lending limits on old and out of date trading figures. “They have fixed rules. They wouldn’t give us the factoring facility we needed – even though factoring is not intrinsically risky.” In contrast Miles found he could raise the money by pitching to MarketInvoice investors.

Stocker says MarketInvoice can help start-ups and young companies. However, those pitching should be aware that fee levels will reflect the investors’ perception of the risk.

Funding Circle: Term loans from individual lenders

Like MarketInvoice, Funding Circle offers an online platform that puts small businesses in touch with investors who will lend money. However, Funding Circle’s focus is on term loans that will be paid off over a specified term – typically one to three years.

To qualify to raise cash via Funding Circle your company will need to show two years’ worth of accounts filed at Companies House, so it’s not for start-ups. However, allowing for the time lag between a trading year ending and accounts being drawn up, businesses as young as two and half to three years can participate. The sums advanced range from £5,000 to £100,000.

The average interest rate is currently 8.4%. However, because money is advanced on an online auction basis, businesses perceived as less risky or particularly attractive can secure better deals. This was certainly the experience of Richard Curtis, owner of Brighton-based Coffee Rites – trading as the Ground Coffee House. He raised £40,000 to open a second coffee house and as he explains: “When the bid goes up you can see all the trading and you can watch the numbers shifting. Towards the end of the process lower bids came in and those automatically knock off the offers with higher rates.” 

According to James Meekings, co-founder of Funding Circle, around 40% of the loans secured through the marketplace are to fund growth, but investors will support pitches from companies seeking cash to manage working capital.

The key to the market’s success in matching lenders with borrowers is a thorough underwriting process that ensures participating companies are good credit risks. This has attracted investors who see it as a means to get a good return on their investment – particularly at a time when interest rates on savings accounts are at an all-time low.

As the financial squeeze continues we’re likely to see more innovative forms of finance emerging and the three profiled here are part of a much larger picture. This can only be a good thing, as it gives young businesses looking for start-up funding or growth capital a wider set of options. 

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Raising finance

Name: Tim Jackson
Company: QXL.com

Tim Jackson started Europe’s first online auction service called QXL.com way back in 1997 and floated it two years later at a valuation of $400m, before it was ultimately sold for $1.9bn. But how did the venture capitalists respond to his attempts to inveigle a few million out of them go?

“The way I raised money was that I couldn’t. I had spoken to lots of entrepreneurs in the course of writing and I had this expectation that I would be able to produce some slides, show it to venture capital firms and a couple of weeks later get my cheque for £10m and get going really fast.

“I went to go and see the European VCs, showed them my slides and a set of forecasts that showed the value of the business was about $20m right now and they were not impressed. They were right not to be impressed but not for the right reasons.

“Their first question was always ‘What makes you think that people will buy something off the internet?’ All the VCs in Europe asked that question. The right question was ‘What makes you think that a journalist with no prior business experience can run a start-up?’

“As I soon discovered, this was a major problem. Anyway, the answer was I started with my own money.

“I stepped down from my first business in 1999 because after about six weeks I realised it’s really easy to look at other people’s ways of doing things but when you try and do something yourself, it’s a lot harder.

“Today, because of Mark Zuckerberg, Larry Page and so on, the assumption of most entrepreneurs is that they’re going to start a business and 20 years down the line they’re still going to be running it.

“It’s worth remembering this is actually a relatively recent phenomenon and that what used to happen was that start-up founders were great at building businesses for the first year or two, but then they had to be kicked aside.

“I thought if the business was going to be a success, I shouldn’t wait until someone on my board took me aside but rather that I should be ready when the time comes and that was about the same time that I started it!

“The first three people I offered the job to said no and it wasn’t until IPO that the fourth person I offered it to accepted the job. We sold QXL for $1.9bn in 2007, I thought it would be worth much more.

“We were the market leader in other countries but I have to admit we didn’t execute very well so by 2007 we were only the market leaders in Poland and Norway which is why it was $2bn and not higher.”

You went from entrepreneur to ‘Dragon’, why?

“Out of curiosity. I couldn’t raise funding when I started and it’s quite stressful when you’re showing up to work every day and thinking I’m getting paid five times less than the largest salary I’ve ever earned.

“I thought it would actually be interesting to see how things look from the other side of the table. Because of my background as a journalist and entrepreneur I had strong opinions about what would work and what wouldn’t and it seemed like a learning opportunity. It’s fascinating how much insight you get if you’re an investor.”

Name: Nick Holzherr
Company: Whisk.com

Nick Holzherr set up Whisk.com during his run on Lord Sugar’s The Apprentice. Faced with the knowledge he hadn’t won Sugar’s investment he set about raising external funds. But what did he go for and why?

“Between my coffee business and Whisk, I started another tech company and that basically funded Whisk at the early-stage. I would be working half days, one day a week or one day in the evening outside of my time from the other company.

“It was always a massive, ambitious idea because we wanted to connect people and give inspiration for food and for everyone to adopt it, and it would cost us a lot of money to do that.

“When I knew I hadn’t won The Apprentice, between that and the airing was about six months, we then looked to raise finance. We secured over £500,000 in two angel rounds.

“We chose angel funding because we didn’t have revenue. Revenue should be the preferred route you use if you can and if I could go back and do it that way I would.

“We couldn’t go to a VC, I didn’t have a hugely wealthy family and there weren’t that many funding options I could go for.

“We found angel investors that were tech entrepreneurs who had done it before, who could help us and give the right advice. I had no experience of how to scale a business.”

How did you secure investment?

“What I learnt very quickly from my mistake on The Apprentice, where I think I overcomplicated the pitch, is that the most important thing when you speak to an investor is to make sure they understand what the concept is and why it’s special.

“In the early days I spent too much time discussing the marketing plan, how the financials would work, who I would hire, before I’d even explained the concept. The thing to get across when you speak to an investor is the concept.

“A huge thing for me was how long it takes to raise investment, it took us six months which I know is very short compared to what I see most start-ups experiencing. We had investors say ‘yep, I’m interested’ but that’s basically just a British ‘no’. It then took about six months to get investors who were genuinely interested to say ‘yep, I’ll put this much money, yep that much equity’ and then you have to wait for them to sign the documents and transfer the money.

“Generally, investors are always going away, they have yachts and big holidays, so they all disappear and it just takes ages for the funding to get signed off. It usually takes about a year to close angel finance.

“Whisk existed at the time of The Apprentice airing but it was just a business plan at that point. The Apprentice didn’t help with investment-raising at all because we had already raised the funding prior to it airing and we weren’t allowed to speak about it but mainly it helped with B2B relationships.

“Whisk integrates with publishers and brands and it was amazing how many publishers, brands and supermarkets called me up after it aired and wanted to work with us. That was a massive asset.

“The comment from Lord Sugar was that we needed more funding than we were asking for and he was right. The first round we raised £170,000. We quickly realised we needed more so we raised £340,000 over an initial six month period and that was primarily invested in technology.

“We’re just in the process now of raising a larger round, between £1-2m, which will be announced in the next few weeks to go towards marketing and business development to help grow the business.”

Name: Stefan Siegel
Company: Not Just a Label

Former model and investment banker Stefan Siegel created fashion database Not Just a Label in 2007. He wasn’t sure he’d tick the boxes with some investors, so what did he do?

“Half of our cash came from the bank of family and friends and my own finance, a £20,000 bonus [Siegel used to work at Merrill Lynch and Ernst & Young before starting his business].

“There’s never been a choice for us to source outside investment as a lot of people don’t understand what we do. Yes, we are a tech company and yes, we’re scalable but only to a certain degree. We give more no’s then yes’ to the opportunities that are offered to us.

“I think we have a much bigger role as we’re an ethical symbol, a project, and so I think it’s hard for us to enter into an investor’s spreadsheet.

“We were one of the first Tech City members and we met a lot of VCs and relevant people but every time they would say ‘Stefan you need to concentrate more on making money’, but for us it’s really about changing the system than making a lot of money.”

Will you ever raise funding for Not Just a Label?

“We get approached by people who are interested but it’s really tough because we have learnt to live without investors.

“We literally have no running costs; we’re a team of 10 people. We don’t earn a lot but we achieve a lot. We have a very powerful business model and we’ve become really good at that.”

Has it taken you longer to achieve your goals without outside investment?

“Yes and no. Last year we signed one of our biggest deals with the government. Thanks to that cashflow we invested in skilled people and we went from salaries of £20,000 a year to salaries of say £50,000 to £60,000 but we didn’t really gain that much.

“I think [outside investment] depends on the business; so many of the things we’ve achieved in the last five years, we couldn’t have done if we had funding.”

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Business finance

What were the practical steps you took to overcome these issues?

First of all, I resolved to learn English at every opportunity I had. I was determined, and I managed to teach myself the language. Some online learning and YouTube videos helped me a lot too.

I started my business with the old transit tipper I got from my previous job, plus my lifetime savings of £160. This was the only money I had available for marketing, running costs and overheads, etc, so I needed to raise more finance. When the banks wouldn’t help me I didn’t know where else to seek advice – I didn’t have any connections. I realised I only really had one other option: to do it myself.

I worked 19 hours per day, including the weekends, for one year to overcome this challenge. I found two part-time jobs, one for the early morning and one for the late afternoon until midnight.

I woke up at 4:30am every morning to go to my morning job – doing the paper rounds for a local newsagent – which started at 5:30am and ended around 7:30am.

I would then return home to take my truck and get on with rubbish collections for my business from 8am. I would finish at 5:30pm, and make my way to a local Indian restaurant at 6pm where I spent my evenings as a delivery driver.

As this job finished around 00:00am, I only slept for about four hours each night. I had a few good friends to help me occasionally with loading the trucks, but I never had any financial support from friends or family. My main aim was to keep existing customers happy, as this was much cheaper than trying for new ones.

It took me one year to achieve the funds I needed to grow my business. I could then afford to buy a second truck and employ two people. At this point I gave up my two other part-time jobs.

What was the outcome?

Since then, I have bought new trucks year after year and employed more people. Today, after seven years, I have developed the business to a point where we employ 10 people and have a fleet of six custom-build trucks. We are now approaching £1m in turnover.

What key questions should entrepreneurs who lack funds ask themselves?

1. Is there a sufficient demand for the product or service you are going to offer? It’s always best to start a service business if you lack funds, as you don’t need to buy any stock.
2. Can the product or service you are about to offer make a positive difference to people’s lives? If the answer is yes, you have a greater chance of building a successful business. Always ask yourself how you could improve on value. Make sure there is no need for customers to look for alternatives elsewhere; it is much cheaper to keep existing customers than look for new ones.
3. What contingency plan do you have in place if things don’t work? Business environments and market conditions are changing rapidly – things can change no matter how good your business plan is. You always need something to fall back on.

What one piece of advice do you think aspiring business owners should take on board?

Building a business is a medium- to long-term activity – it is likely to need a lot of planning and very large personal sacrifices.

Be clear about your motivations and be honest about your level of ambition. Don’t wait for the perfect business plan. Start now, fail, learn and try again.

Is there anything you would do differently?

I did everything I could at the time to make to most of very limited resources. Looking back at these things after seven years, I have nothing to regret. It has been hard but I didn’t waste any time, I am always glad of that.

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Starting a business

What were the practical steps you took to start a business on a tight budget?

We bought cheap, small equipment at the start. Then, once we had an idea of what we actually needed, we spoke to other traders to get more advice before investing the money we made into that equipment.

It’s very important at the beginning to live within your means as a business. You may have big dreams, but we’ve seen others come in and spend a lot of money on loads of equipment, half of which they end up never using – it’s just money down the drain.

If you start small you get a much better idea of what you actually need and where to get the best deal.

The same goes with new sites and staff – only do what you can afford. Do the maths, see if it’s feasible. We learnt what was and what wasn’t through experience and sharing experiences with other traders.

Once you’ve made one bad investment in an area where the rent is too high, you learn pretty quickly what to look for in a site: where is it, what are the costs that make the rent high, how many staff will you need to be there, what are the times you can trade there, have they done it before, how are they marketing it, who are the other traders there, etc.

The list goes on, but it shows how many different factors go into finding good trade in a location.

Having a good idea of your numbers is important too. We used accounting software FreeAgent, which clearly showed us where we were overspending and helped us become profitable week by week.

What was the outcome?

Three years later we have carried on with this format with every investment we do.

Whether it’s equipment, new market sites or new suppliers we take our time and do it methodically, ensuring that we’re providing the best service we can whilst still running a healthy business.

What three questions should cash-strapped entrepreneurs consider when investing in sites, equipment and staff?

1. After all your business costs, have you got the money to spare?
2. How much do you need it, whether its a new location, new equipment or a new hire?
3. How much longer can you go without having a new site, equipment or extra staff?

What one piece of advice do you think entrepreneurs should take on board?

Live within your means as a business. You’re not a hero by taking on more debt or higher rents than you can afford.

Is there anything you would do differently?

At the beginning we said yes to too many things, which resulted in being at markets where the rent was far too high for what it was.

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Funding a business

A Start Up Loan

If you are starting a new business or you have been trading for no longer than 24 months, you may be eligible for a government-backed Start Up Loan. These are unsecured personal loans of up to £25,000 that must be used for business purposes and a repayable at fixed 6% interest p.a. See if you are eligible for a Start Up Loan here

Bank overdrafts

For companies with fluctuating income, a bank overdraft can provide quick, flexible cashflow. The idea is simple: you dip into the overdraft in the leaner months, and come back out when the business picks up.

Most major banks charge interest only on the amount you overdraw, and many offer tailored packages for young businesses. For example, RBS/NatWest provides overdrafts up to £500, free of set-up fees, for a start-up business’ first 12 months (normally £50). However rates of interest on bank overdrafts are usually charged above base rates (e.g. 6.5% for RBS/NatWest), and in most cases the overdraft amount is repayable on demand.

Cash advances

Companies such as Worldpay, Business Cash Advance and Credit for Merchants allow businesses to receive money upfront before debts and invoices have actually been paid.

Under the terms of the agreement, the financier purchases a fixed percentage of your future credit/debit card transactions at a discount, and then advances the cash into your bank account, usually within 10 working days. Repayments will be scheduled at a pre-agreed percentage of every transaction – usually between 10 and 20%.

With a cash advance, you can secure up to £100,000 without the burden of collateral or fixed monthly repayments, only paying the advance back when your customers pay you. But you may have to meet a rigorous set of conditions; for example Business Cash Advance insists all clients must have been in business for at least a year, with a minimum monthly turnover of £3,500 and the ability to process credit and debit card transactions. Request a callback to discuss business cash advance here

Asset finance

An asset-based loan works the same way as a mortgage. You borrow money against an existing possession, and, if you can’t meet your obligations, the asset is repossessed. Assets which can be used as collateral include property and premises, accounts receivable, inventory and equipment.

Although interest rates are often punitive, asset-based finance can be extremely useful for a company desperate for cash, or a business backed by valuable property which has yet to make major profits – such as a hotel or plant hire specialist.

Factoring

MarketInvoice, an online marketplace which allows you to auction your invoice to a community of investors. You receive payment straight away and the investor will receive a profit when the payment finally comes in.

Angel investors

If you manage to impress a business angel, they may provide investment in return for an equity stake. Most angels are seasoned entrepreneurs themselves, so they know what you’re going through and they’re likely to be patient.

Furthermore, the process of finding and enticing an angel is far less daunting than you might think. Take a look at our investor directory to take a look at some of the most active angel funds and angel investors in the UK. If you can put together a tight pitch with realistic growth projections, and are prepared to give up a share of your business, this could be the route for you.

Crowdfunding

Crowdfunding is, essentially, an extension of the charity sponsorship page in the business world. People come together, on crowdfunding sites, to pool money towards a particular venture or idea – it could be ten people putting in £500 each, or 3,000 people each giving £1.

Donors or investors on crowdfunding sites, such as Kickstarter or Crowdcube are typically private individuals providing small sums, so they’re unlikely to give you the sort of grilling, and rigorous conditions, an angel investor would. You can also scope out the popularity of your idea via a crowdfunding site, and get some crucial word-of-mouth marketing going.

If you’re interested in raising finance using crowdfunding take a look at our crowdfunding form. We’ve partnered with a few crowdfunding platforms to help businesses raise seed or growth capital and may be able to point you in the right direction.

Peer-to-peer loans

A peer-to-peer exchange site, such as Zopa or Funding Circle, will put you in touch with private lenders, and create a personal relationship between you and the lender – fostering trust and patience.

A number of companies are now well-established in this space, and several offer generous terms. Indeed Zopa waives all fees for loan applications, reduces interest rates for borrowers who make early repayments, and adds only a one-off fee of £130 to the cost of the loan.

Micro-loans

If you only need a very small amount of money, you should think about a micro loan, which is tailored to your circumstances and can be used alongside funding from other sources.

A number of companies in the UK offer micro loans; for example Finance Wales offers funding from £5,000 to £25,000, with generous repayment terms ranging from one to five years.

Community schemes.

A plethora of community development finance initiatives, or CDFIs, have been set up around the country to help individuals, and businesses, denied credit by banks and lending companies.

CDFIs provide help with everything from bridging loans and working capital to funds for property and equipment purchase, but their terms are usually restrictive; you usually have to be either a micro-business or a social enterprise, and be based in a disadvantaged area to qualify.

Family loans. If you want to keep things ultra-simple, a supportive family, with money to spare, can provide a fair, willing and reliable source of loan funding. Relatives and loved ones are more likely to trust you with their money than an outsider, and they will probably demand lower interest and fewer incentives than a commercial organisation.

Bootstrapping a start-up

Bootstrapping!

Business Finance

Your options for raising finance are no longer limited to re-mortgaging your house or approaching your bank manager, cap in hand – click the links below to find out more about potential business finance solutions.

1. Business loan

Despite a fall in lending, the traditional business loan route is still a popular option for start-ups, and you have the advantage of retaining equity in your business. Start off by reading Startups’ step-by-step guide to obtaining a bank loan for a clear guide to maximising your chances of approval.

The government is pushing hard to increase the availability of these loans for small business, through initiatives such as Funding for Lending, Start-Up Loans and the Business Bank. Make sure you know the ins and outs of these as they could represent a vital lifeline for your start-up.

2. Small business grants

Not surprisingly, start-up business grants are highly sought-after, and hence difficult to come by. If you can obtain one, however, the benefits are obvious and numerous – start by reading our guide to the different types of grants available, and learn about the different institutions that provide them.

There are always new business grants emerging so keep your eye on the relevant places. Stay ahead of the competition by keeping our 10 top tips for securing a grant in mind.

3. Invoice finance or factoring

Invoice finance, or factoring, is a popular option for businesses with unpaid invoices to access working capital quickly. If you’re unfamiliar with this funding method, learn what it is and how much you can raise.

As the majority of providers will make you commit to a deal for 12 months or more, make sure you know how to choose the right one.

4. Crowdfunding

Crowdfunding sites allow members of the public to pool their resources, investing as little as £10 each in start-ups. If you’re unfamiliar with this increasingly popular method, read more about what it is and get the lowdown on the different crowdfunding platforms available.

Startups has various guides on how to crowdfund, including Modwenna Rees-Mogg’s guide on how to make a crowdfunding campaign attractive to the public.

5. Angel investors

Angel investors can provide huge injections of capital early in a business’ life to propel it to stratospheric heights, as well as using their experience and connections within a sector to great effect.

Learn about how the government’s Seed Enterprise Investment scheme can maximise the effect of such investments, and read Guy Rigby’s 10-step guide to wooing angel investors.

6. Bootstrapping

If you’re still finding funding difficult to come by, don’t despair. It is possible to bootstrap your business and there are a number of low-cost start-up opportunities.

Many businesses can now get off the ground for under £10,000 – and some sectors allow you to start for as little as half that. Any entrepreneur should know the essential principles for keeping a start-up as lean as possible; read Philip Letts’ guide to spotting a lean start-up to see how you can do this yourself.