A guide to entrepreneurial financePosted on: September 2, 2021
Startups in Britain have grown in popularity in recent years. Support has become increasingly available to develop a strong entrepreneurial ecosystem and many individuals are deciding to turn an idea into a business or work for themselves. It is currently estimated that around 1,843 new companies are founded every day.
To reflect this, small and medium enterprises (SMEs) make up a total of 99.9% of companies in the UK, totalling over 5.9 million small firms.
Starting a new business, though exciting, comes with high risks. 20% of businesses fail in their first year, and around 60% will go bust within the first three years. One of the main reasons for this is running out of cash.
What is entrepreneurial finance?
While corporate finance focuses on existing businesses and the challenges they face to deliver returns to their investors and increase shareholder value, entrepreneurial finance is the study of value and resource allocation. It is centred around new businesses and the owner’s challenge to acquire the funding needed to test whether the business can become financially sustainable.
All entrepreneurial ventures which are reliant on funding to get started must ask how much money can and should be raised, at what point in the journey, and which sources of funding are viable.
Raising money can be a drain on time and existing financial resources, so it is important that entrepreneurs do their research into the routes most likely to result in positive outcomes for their business model and industry.
What are the sources of finance for entrepreneurs?
There are many different sources of capital financing for entrepreneurial firms, though all range in levels of success depending on the business type and the sector it is looking to break into. Each of them have different investment approaches and valuation methods and measures for whether funding is viable.
Venture capital and angel investors
Venture capital (VC) is a form of private equity. This type of entrepreneurship financing is often reserved for startups and small businesses which have the high-growth potential for long-term success. This generally comes from well-off investors, investment banks, and other forms of financial institutions. Venture capitalists don’t always provide investment in the form of financial funding, as this can also be provided to a business in the form of technical or managerial expertise.
This can be a risky choice for investors as it can be costly in terms of either money or time. However, investors usually get equity in the company and so have a say in operations and decisions, and the potential for above-average returns is an attractive payoff.
Angel investors, or business angels, are typically a group of entrepreneurs or former executives who have amassed personal wealth through a variety of sources. These high-net-worth individuals (HNWI) provide venture capital, and often co-invest alongside a trusted associate into the same or similar industries in which their experience lies.
When looking for equity investors, it is important to note that only around 1% of businesses secure funding from venture capitalists and angel investors, so it won’t be an option for many.
Crowdfunding is when a business or new venture is presented online with a summary of the business plan, with the objective of raising money from individuals. There are four main types of crowdfunding.
This type of crowdfunding is the process where people can invest in an early-stage company which is not listed on a stock market in exchange for shares in that company. Some case studies of companies who took this route include banking app Monzo which broke records when it reached £1m in 96 seconds in its first round of crowdfunding, and BorrowMyDoggy which has grown to a community of over 250,000 members in the UK and Ireland.
Backers who invest in reward-based crowdfunding are often given something in exchange for a financial contribution. One example of this is the crowdfunding publishing platform Unbound, where individuals pledge to a book they want to see published in exchange for rewards such as merchandise or their name listed in the back as a supporter.
This is used by individuals or non-governmental organisations raising money for a cause, like JustGiving pages.
Debt-based crowdfunding is when investors lend money through a platform to a business, removing the middlemen who would have been involved if the transaction had happened through a bank. It keeps the costs down for borrowers and gives lenders potentially improved rates of return.
Trade credit is a form of financial bootstrapping – an inexpensive route for entrepreneurs to explore when raising capital as it relies on the ability to utilise company resources and opportunities.
Suppliers will often extend trade credit to regular customers, so the bill for goods isn’t due for up to 90 days. Though many suppliers may not do this initially for startups, one thing which could sway them to the entrepreneur’s favour is if the business has a properly prepared financial plan.
Initial public offering (IPO)
An IPO is the first time a company sells its shares to the public in a bid to raise money. This form of financing is used by businesses of all sizes and at all stages, and requires a lot of preparation, bureaucratic hurdles, and paperwork. This means that it is a risky option for startups as it can take a long time and incurs costs throughout the process.
IPOs are most successful for small but growing companies who already have a foothold in their industry. Meal-kit company HelloFresh already had 1.3 million subscribers globally when they launched their IPO six years after being established.
Business loans can come from private companies or can be government-funded, and are an option for financing the needs of a new business. It can help to cover initial costs needed to establish a new venture, like working capital, rent costs, equipment and supplies. Though a business loan may be an easy way to secure cash flow, it will need to be paid back. Tracking business finance and the incomings and outgoings, and shopping around for low interest rates is essential.
Learn more about entrepreneurial finance
The University of Wolverhampton’s 100% online MBA Finance will teach you more about small business finance, and finance for international business. Whether you’re an entrepreneur looking to start your own venture or are growing your career in finance within existing corporations, our MBA will put you on the right track for success.
Studied part-time while you continue working, this degree is a combination of theory and practice which you can apply to your day-to-day role or use for career progression.