All about small UK business investment

Looking to invest in business opportunities? ABF can help you secure the right financing for your growing business and discover more about a business investment account.

Why would you require business investment?

Whatever the size of your business, it may be that it requires funding and investment at some point, whether it’s to get the business off the ground, or to move to the next stage of its operations, expand or diversify.

Businesses can fund themselves, spending revenue on improvements or expansion. But if the business doesn’t have the funds on hand, and doesn’t want to take out a loan, the business owners can appeal to investors for a cash injection.

What are the different types of business investment?

Business investment is a broad term, encompassing a range of different approaches. We’ll focus on the most common types, which are dictated by the requirements of each individual business.  For start-up businesses, investments will need to be made to build up stock, rent or buy a premises and pay employees.  Depending on the requirements of your business and at what stage of the business lifecycle you are at, you may want to look at the following options when it comes to securing investment for your business venture:

• Venture capital
• Angel finance
• Insider finance
• Crowdfunding
• Flexible business loans
• Equity crowdfunding
• Asset finance
• Business expansion funding
• Export invoice finance

Venture capital:

A venture capitalist (VC) lends capital to businesses and start-ups in exchange for a certain percentage of equity in their business.  Ordinarily the businesses receiving the funds would need to demonstrate high growth or high growth potential in order to grab the attention of a Venture capitalist or VC firm.

Angel finance / Angel investors:

Angel investment comes from an affluent individual, usually an entrepreneur themselves, to a start-up or growing business.  Angel investors can choose to receive an ownership stake in the business in which they are investing or receive return plus interest from the business profits.  Angel investment can either be a one off cash injection to the venture or a set of staggered investments at different stages of the business lifecycle.

Insider finance:

Insider finance or insider investment simply refers to an investor who is already within your network.  Most of the time this is a family member or close family friend but not always.  Insider finance tends to be a little less formal than a normal business / investor relationship.  However, to be on the safe side it is always best to agree on the terms before accepting any money from friends or family.  This way everyone knows where they stand and what is expected from them.

Crowdfunding:

Crowdfunding in recent years has become one of the more popular ways of securing business investment in your venture.  Instead of more traditional forms of business investing which generally secures medium to large amounts of capital from a handful of investors, crowdfunding aims to secure small amounts of capital from a large number of investors, all of which receive either a small amount of equity which will hopefully grow or early access to products or services in the business in which they’re investing.

Flexible business loans:

Flexible Business loans are a more traditional form of business investment available to the business owner.  They can come from the high street banks, challenger banks or niche lenders.  The downside to this form of business investment mainly comes from the barriers to entry.  High street lenders in particular will want to see a solid credit history and returns plus interest from their investment sooner than other forms of business investment.

Equity crowdfunding:

A form of crowdfunding that only offers equity in the business receiving the finance.  This finance mechanism allows a broad group of investors to all invest small amounts of capital in return for a stake the business.  As the business profits grow, so then does the equity share held by each individual investor / equity crowdfunder

Asset finance:

Asset finance is a form of business investment used specifically to fund the new acquisition of items used by your business.  This could be in the form of vehicles or business equipment. This sort of business investment can also be used in reverse in order to use current assets you already own as security for a cash loan based on the value of the asset.

Business expansion funding:

Business expansion funding or business expansion finance can be a form of business investment that encompasses more than one of the above business investment models.  It can be in the form of asset finance, venture capital, or invoice finance and is used to fund the expansion of your business.  This could be for a number of reasons including a move into new markets, to recruit more staff, or introduce more products to an existing range.

Export invoice finance:

Export invoice finance is very similar to the more general invoice finance but specifically covers invoices awaiting payment from international export sales.  Usually this sort of business investment is used to cover gaps in cash flow but will come with stipulations such as the items being exported must have already been shipped.

For a more established business looking to grow – it may be that you need to balance production or service capacity to meet demand and continue to grow revenue – additional investment may be able to enable that growth.

In addition, the Business Growth Fund, which funds businesses in a number of different cities, may also be able to provide funds, as well as tools and expertise to help meet business goals.

Once your business is more established, asset finance might become more relevant as you look to improve productivity and drive innovation.

Business expansion funding is a good option for a businesses with growing market share and a desire to expand into new markets and distribution channels. Another business investment option could be export invoice finance, which makes it easier to release cash from unpaid invoices in other currencies. Mezzanine funding may also be relevant at this stage.

A mature business may have different needs to address, such as declining sales or profits, or negative cash flow or a plateau in growth following a period of expansion. Additional investment options include a commercial paper (a short-term, unsecured debt issue) or an initial public offering (IPO) of company stock.

How can I find business investors?

If it’s investment from funds held by the company, a business investment account can be useful. These are instant access savings accounts that enable interest to be earned until the funds are withdrawn. Cash can then simply be transferred to the main business account to be directed into the investment needed.

As mentioned, there is a large range of business investment options available to businesses. Some will be offered by banks, while others will come from specialist providers or markets.

How should I choose an investor?

In general, investors want business investment opportunities that provide a good return on their investment, either in the form of repayments with additional interest, or income, such as dividends or a profit share, or a stake in the business that has been invested in.

The choice of investor therefore depends on what works best for your business. Businesses at different stages of development will benefit from different types of investment, but individual business owners also need to work out whether they are prepared to give up stakes in their business or pay different levels of interest, as well as doing thorough research about the investor or lender they’re considering.

What are the risks of business investment?

Ownership investments such as stock, means investors own a right to a portion of the value or profits of a business. Giving this up to a third party – such as an angel investor – is always a risk, as it also means giving up a degree of control. Do your due diligence when selecting the right investor to minimise the risk.

The other major risk with business investment is that it isn’t guaranteed to pay off. Money borrowed or received from investors may not result in the growth or profit that the business is aiming for. The funds would transform into deadweight, nothing more than debt requiring servicing. However, the assessment process that lenders conduct should reduce the likelihood of this taking place.

Investors who end up with a stake in the business that is worth less than they paid for it can either hang on and wait for things to improve or sell their stake to other investors or back to the business. The financial risk is therefore minimal for the business, although investors in such circumstances may become more vocal about what the future direction of the company should be.

How much does business investment cost?

Again, this depends on the type of finance you use. There will be fees and interest payable on many financing options, while ownership investment will cost you the value of a stake in the business. The costs depend on what form of business investment you decide to make use of.

Whatever the reason for your business seeking out business investment, make sure you explore all the different possibilities thoroughly and take the decision which suits your bsuiness and your own circumstances best. 

Don't hesitate to get in touch if you require any further assistance.