Don't just bank on it: funding comes in many forms

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There are many funding options available

According to EY, lending to British business will increase by £66bn by 2018 as the financial services sector regains its appetite for risk. Good news, but unlikely to make a significant impact on small businesses looking to raise capital in the short term. Securing funding has always been one of the biggest challenges a business will face; both for start-ups and for those that are already established but want to avoid giving away a huge amount of equity.

My experience has taught me that the majority of potential investors will be looking for reasons to say ‘no’. I think I’ve heard them all: ‘It’s too early stage for us’, ‘the team is too inexperienced/experienced’, ‘the product is not ready’… the list goes on. Small businesses need to learn how to provide reasons for them to say "yes". Perseverance is key – don’t lose heart when people tell you that they're not interested.

Consider all the different funding options available. Family and friends may be your best bet to begin with because they trust you as an individual, but they’ll still want reassurance that you have something to fall back on if plan A doesn’t work. Angel investors will say "yes" if they feel they understand the industry and think they can add value, but they’re also more likely to want a large amount of equity.

If you are looking for a higher sum without giving away too much of the equity, you may want to consider Venture Capitalists (VCs) or Venture Capital Trusts (VCTs). Although VCs focus on early stage businesses, they tend to look for an established track record of sales, which cuts out a large proportion of young start-ups. VCTs, on the other hand, were created to support the growth of smaller companies and to nurture entrepreneurship in the UK. They offer attractive tax breaks to entice investors despite the higher risk of the business portfolio.

The VCT route worked well for us. We received £1.9m investment from Octopus’s Titan VCT fund in 2010, and benefitted from another round of funding from Octopus in 2014. This time, however, the amount was £5m and included a significant investment from the Business Growth Fund (BGF).

Securing funding from the BGF requires a slightly different approach. The fund is backed by five of the UK’s main banking groups – Barclays, HSBC, Lloyds, RBS and Standard Chartered – and specialises in what is known as "patient equity". This means that the focus is on long term growth rather than a quick return. To secure this type of funding you need to demonstrate that you have a strong long-term growth model.

Whichever funding option you choose, you should consider the following:

• Start early: Don’t just seek investment when you are out of cash but start talking to potential funders early on. You can get to know each other over time and you’ll be able to demonstrate progress and growth.

• Think about how each fund can add value: Remember that the connections and support they can provide will vary. Take references from portfolio companies and make sure you walk into the deal with your eyes open.

• Consider whether you can offer some kind of mitigation against a big risk in their existing portfolio: I remember one VC being extremely interested in the overseas possibilities for Semafone as a hedge against his existing portfolio's exposure to the macro performance of the UK economy.

• Get the team right and the money will follow: Work on attracting A-grade people to your company. Not only will they be the real driver for the business, but they’ll also be critical when attracting funding.

• Know your numbers: Make sure you understand every detail of your business.

And finally, as you think about all the financial reasons to persuade backers, don’t lose your own sense of excitement. It’s your business, it’s a great opportunity, and you are passionate about it - so make sure you use that enthusiasm to bring other people on board.