Business angels

In contrast to venture capitalists, business angels are more inclined to invest in startups and early-stage businesses. They may also be more flexible in the way they finance a business because they will have a less rigid time frame for exiting a business (i.e. sale or IPO).

When it comes to the type of business they might invest in, angels and venture capitalists are similar. They look for business that that have good growth prospects –you’ve a greater chance of piquing their interest if your business occupies a niche market, has a new product or has a clear advantage over your competition. And you’ll need a good business plan.

From the perspective of your business, you’d benefit from the experience, skills and business contacts that your investor can share with you. Bear in mind your relationship with your investor will likely be close and personal – so you need to get along well and share goals.

You might also want to consider debt crowdfunding – more commonly known as peer-to-peer-lending (P2P). Peer-to-peer lending (P2P) is a type of business loan by a large number of private investors (individuals, businesses or institutions) to your business, usually through an online platform. The idea is that lenders and borrowers get a better rate than they would through banks – plus decision lead times are significantly shorter. P2P is also known as debt crowdfunding or loan-based lending.

Peer-to-peer lending (P2P) is different to standard business loans. P2P matches private investors looking to invest their money with people who want to borrow it. In theory, compared to banks, P2P pays higher interest to lenders and charges lower rates for borrowers. The stronger your business profile, the lower the interest rate on your loan.

Other types of equity finance – Equity finance refers to the capital an external investor injects into your business in return for a share of ownership (equity) and/or some control of the business. Equity finance investors therefore have a claim on your future earnings but, in contrast to a loan, you don’t pay any interest – nor do you have to repay capital. If you opt for equity financing, you’ll sell a stake in your business in return for funds. This is in contrast to debt financing (e.g. a loan or a bond) where you take out a loan and pay it back over time with interest.

Venture capital – Venture capital is financing given to startups and early-stage businesses. Venture capital funds look to invest larger sums of money than business angels – typically more than £250,000 – in return for an equity stake. Venture capital is most suited to high-growth businesses with long-term growth potential, i.e. those destined for sale or public listing (IPO).

Equity crowdfunding – Equity crowdfunding is a type of equity finance whereby people (‘the crowd’) invest in an early-stage unlisted company, in exchange for shares (equity) in that company. Individual investors thus become shareholders and stand to profit if the business does well – they might also lose some or all of their investment. Equity crowdfunding usually takes place over an online platform.