Pros and cons of different funding options

My brother and I plan to go into business on the internet selling cosmetics but we need money. What are the pros and cons of the different funding options available?

For a start, let me say that you are going about your business venture in the right way. To start a business in a sector which you are already working in is the best way forward. You understand it, you know where to get your supplies and you have experience of the market. I am also encouraged by the fact that you have focused on the research and finding your niche.

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Given this background, you should be able to raise some money to help you develop and exploit the opportunity you have spotted. What you have been offered are two completely different types of finance. Although you have not given details of what your bank manager has suggested, I guess it is likely to be some form of loan, possibly five to ten years. You will have to pay the interest on the loan and commit to repaying the amount you have borrowed over the period of the loan.

Less likely, your manager might have suggested an overdraft. You have to pay the interest on the amount borrowed, and the overdraft will have been agreed for a period of time, typically one year. The bank manager could demand that you repay at the end of the agreed period. In fact, you might be asked to repay the overdraft within a shorter period.

As you will see from my description, an overdraft is a much less secure way of borrowing money. You must ask the bank to set out in detail what you are being offered, when you have to repay and what rate of interest you are being charged. If you decide to get your money from the bank, you should shop around to other banks to see if you could be offered a better deal.

p> What the agency is suggesting is finance of a completely different type. Typically a business angel is a business person who invests money in a new or small enterprise in exchange for shares in that enterprise. This means that your business needs to be in the form of a limited company and that the business angel will be a part-owner of the business along with you and your brother. As to how much of the company the angel would own would be a matter of negotiation and you should get an accountant or solicitor to advise you.

While this might all strike terror into your heart, there are some advantages in accepting an investment like this. Firstly, you don’t have to repay it and you don’t have to pay any interest on it. When you are struggling to make money and get your enterprise off the ground this can be very helpful. Secondly, the angel may be an experienced business person who can provide skills and knowledge which you and your brother lack, thus making your management team stronger.

Counting against these factors, there will be restrictions on how you can spend money and manage the business. The angel might look to get a salary from the business and possibly dividends (which as a shareholder you would also receive). Less obviously, you might not hit it off with the angel and not work together well. While seeking investment from an angel needs very careful thought, research and negotiation, it could be a very successful way of financing your idea while gaining extra management help.

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