by Hussein Ahmad of Viewpoint Partners

You could be starting a totally new project, expanding to a new site, diversifying your offering or adding new equipment. Raising funds means that you can do this without having to compromise any emergency funds.

If you haven’t already, you’ll need to put a business plan together, including forecasts. Whatever route you go down, you should also put together a pitch deck, so that you can show potential investors who you are, why you need the money, when and how you will spend it, and why your business is a great investment.

So how do you decide which route to take? The main question to ask is how much control (giving up shares) of the company you’re willing to give up vs the cost of debt (interest) if you fund the investment with loans. After asking yourself this question, you can then structure your investment to match your profile. Read on for more detail on the different options.

1. FRIENDS AND FAMILY (Loan or Investment)

• It might be as easy as asking! But it’s a good idea to treat this as you would any investor, with a proper pitch deck and business plan.
• You should always keep it formal with the correct paperwork, to avoid potential confusion or conflict.

• They are likely to provide the money with no interest, or significantly less than a traditional lender.
• There may be more flexible repayment terms.

• Mixing business with family or friendship can cause tension, especially over something as emotive as money.
• If they ask for equity, you may risk having a vocal contributor to the business, without the experience or expertise to back up their input.
• If anything goes wrong, you are risking the money of people whom you love. That can come with a lot of guilt and/or fallout.

2. CROWDFUNDING (Prepaid Income (by offering rewards) or Investment)

If you have a strong audience already, crowdfunding is a fantastic way to raise money without too much risk. Some people offer equity, but a more usual / safer route is to offer ‘rewards’, which will get people excited about the opening. You’ll need to work hard to shout about your goals to get people excited – that means a big social media push, reaching out to anyone who can amplify your message, and getting creative about the ways you can get your committed community involved.

• Figure out whether you’ll be offering rewards for various cost levels, or equity in your business. You need to be careful when you calculate what you offer, so that you don’t end up giving too much away (but so that it’s still attractive).
• There are lots of platforms that you can use – some are equity-based and some are rewards-based, so do a bit of research and find out which one is right for your goals.
• You’ll then need to do all the marketing yourself. The more people you can get involved and excited, the wider your message will spread. Think about asking friends with influence to donate rewards too, so that you can also reach their audience.

• It’s a great form of marketing! You generate visibility for your plans and your project right from the beginning.
• People become engaged with your journey, and feel that they have emotional as well as physical investment in your business. That generates or grows a tribe of loyal customers right from the start.
• If you’ve got an unconventional idea but a strong community who you know will engage with it, crowdfunding can be an easier route than traditional financing.
• You don’t have costly interest or repayment commitments.

• If you don’t have a committed following, it can be difficult to raise the capital from ‘cold’.
• You risk failing to reach your target, which can be embarrassing – or even worse, detrimental to your chances of raising other forms of finance.
• It can be a really long and tiring process while you are in your big marketing push, not to mention pretty nail-biting as you’re constantly glued to the figures!

3. PRIVATE EQUITY / VENTURE CAPITAL / ANGEL INVESTOR

The above do not invest unless they know what their exit is. Your goals must align with theirs, and you must be comfortable with quite a very commercial outlook which is likely to involve pushing sales and/or cutting costs – they are not investing out of love for the project, but out of a need to make money from it. That can risk putting you at ideological odds with your investor, and can create conflict.

Each of these are slightly different, but the processes and results are very similar so we are grouping them together.

• You may be approached by potential investors, or you can do some research into people or companies who have invested in similar businesses. Investors tend to have a particular area in which they specialise – however bear in mind that they’re unlikely to invest in a company which poses a direct competition/threat to their current portfolio.
• It’s vital to put together a really in-depth business plan. You’ll be presenting this to people who really know their stuff in terms of business, so make sure this is really water-tight!
• You’re also going to need a deck, which presents who you are, your plan, your finances, your strategy, your extensive research to back up the project, and more. Typically, potential investors will only take 60 seconds to look through a deck for the first time (perhaps less, if you’re approaching them cold). If it isn’t eye-catching, thorough and compelling, there might not be a second time.
• Investors will then meet with you for an in-depth discussion, which could be a presentation to talk through the deck in greater detail, or it could be a more informal chat.
• Most investors will then take some time to do ‘due diligence’ on you, which means a thorough investigation of you, your business, your research and the claims made within your deck. Of course, the more money you’re asking for the more crucial this will be to them – so make sure you can really back up any assertions you make!

• If you want to scale fast, and/or believe that your business would suit a roll-out model (ie expansion to multiple sites) this is likely to be a great route for you.
• You gain expertise on your board – their priority is the business’ financial success, so they will be committed to helping you get there, using their knowledge.
• Depending on the investor, you potentially gain access to their shared head office functions (finance/HR/Legal/Marketing).

• As the hospitality sector becomes more challenging, investors become more reluctant (or need a plan which generates quick returns and a quick exit).
• There can potentially be a loss of control, depending on how much share capital you give up.
• You may be forced to dilute your original vision: the investor’s vision and direction will be based on how much money you can make, not on passion for the product.
• The investor may not have experience in your specific field, leading to a mismatch in understanding or direction.
• If there is a change of people at the investors, that may affect the relationship with you.
• If you want to part ways, this can be extremely difficult – especially if your deal means that you have the lesser control, which is common. That means you could find that someone else has control over your vision, your ideas – and even your name, while you are out of the picture. This could be psychologically, emotionally and reputationally damaging to you.

4. DEBT FINANCING

If you are a fledgling business then it can be very difficult to arrange a traditional loan from the bank, however you may qualify for a start up loan through the British Business Bank.

You may also be able to access loans through assist finance (for example borrowing against your brand new kitchen), or peer-to-peer lending. All of these are slightly different ways to get a loan, but they all incur interest which needs to be paid back. This can cause significant financial burden, in a challenging trading environment.

• The British Business Bank is a government-backed scheme helping you access unsecured finance through their partners, to either start up (between £500 and £25k) or scale up (you can access more). They have lots of resources such as business plan templates, and helping you work out what you need.
• It matches you with investors – whether investment companies or banks – and lends you money under consistent terms.
• There are also lots of peer-to-peer lending sites, which will match you with potential investors. You can distribute the investment across several parties, or you can ask one person to invest everything.

• You’re not giving away equity, so you remain in total control of the vision and the day-to-day operations.
• It can be quick to arrange.

• It will be expensive as any interest paid is a cost to the business.
• Impact on cashflow. As a fledgling business keeping cash in the bank is vital, and having to repay your loan is going to negatively impact that.
• The directors will almost certainly have to personally guarantee the loan, so this means you will be personally responsible for the balance even if the company closes down.

5. BANK LOAN

• Bank loans are typically secured, which means that if you are unable to make payments then the lender will have the right to reclaim your business assets.
• You’ll need to put together a tight business plan and deck, as the bank will want to know that their money is safe – ie you will be able to make the repayments.
• If you can show that you will have long-term growth then even better, as you will continue to be a lucrative client for them in the future.

And Finally…

HOW CAN YOU MAKE YOUR BUSINESS MORE ATTRACTIVE TO INVEST IN?

• There is a government scheme called “Enterprise Investment Scheme” and its sibling “Seed Enterprise Investment Scheme”. If you qualify for this, it can make investing in your company very tax efficient for your investors.SEIS is focused on early stage companies and the maximum investment that can be raised is £250,000. An investor is able to get a 50% tax break on the value of their investment. E.g. if £10k is invested then £5k can be reclaimed against income tax paid that year. There is also no Capital Gains Tax to be paid if the shares are sold (shares have to be held for a minimum of 3 years).EIS is to raise larger amounts of investment, the maximum amount that can be raised is £12m. Tax reliefs are the same except 30% tax break instead of 50%.
• A business must be considered a “risky” investment to qualify, and in the main hospitality businesses are considered to be very risky.
• You will need to get approval from HMRC that your business qualifies. This approval can be a great sales tool for all types of investors – friends, family or crowdfunding.