SME

As a Director of Elevate Online Marketing, I have the privilege to discuss with other company owners / shareholders the diverse options SME’s have when looking to evolve and plan for the next big step.

I quickly realised that many were notably unaware of the assorted options one could turn to, which is why I thought to share the below in my tradition of keeping it simple.

Let's delve into five distinct types of investments and their alignment with your business model, along with their respective advantages and disadvantages.

BOOTSTRAPPING

The most effective investment often comes from within. Bootstrapping involves utilising personal finances or operational revenue to initiate or expand a business. In this scenario, entrepreneurs with limited capital invest their own money rather than relying on external funding that might dilute their ownership of the company.

This approach offers the advantage of retaining control and ownership in your business. When you use your own funds, you bear the risk of failure, but you also reap the potential for significant returns and enhanced profitability. However, bootstrapping has its downsides, such as straining your personal finances and limiting your capital compared to external sources.

A notable advantage of this strategy is that, after the initial personal investment, you can still consider external investments. Maintaining control while growing your small or medium-sized enterprise (SME) means that your ability to attract future investors is less constrained by external influence.

FRIENDS AND FAMILY

There's another avenue to secure capital for SME growth without venturing far from your inner circle. Utilizing investments from family and friends can be an effective way to kickstart your expansion.

One significant benefit is that it's one of the easiest ways to obtain funding for your SME. Moreover, by offering shares in your company to family members in exchange for capital, you can rely on them as trusted advisors who are motivated to see your business thrive. Like bootstrapping, this approach opens doors to future external investments, as ownership remains local and proves attractive to other potential investors.

It's essential to be aware of one potential drawback: if your family or friends' investment doesn't yield returns or if your business growth strategy doesn't succeed, it could strain these close relationships. This underscores the importance of formality in investment. Present your plan transparently and be upfront with investors about potential risks. A well-defined plan is the most appealing.

SMALL BUSINESS LOANS

SMEs are the backbone of the UK economy, and the government actively supports their growth. Small business loans offer a viable option for financing your expansion without sacrificing ownership of your company. These loans do not grant lenders influence over how the funds are used in your business.

However, the financial risk primarily rests on your shoulders, as loans must be repaid, even if your growth strategy doesn't pan out. This can place additional financial constraints on your business.

PRIVATE INVESTORS

When considering equity investments, it's crucial to understand what your SME can gain from such arrangements. Investors typically inject substantial capital but expect commensurate returns as your business scales. Two primary types of investors may express interest in your growing SME:

ANGEL INVESTORS: Often approaching businesses at their inception, angel investors offer more than just capital. They bring a support network of other businesses that can facilitate your company's growth, offering valuable insights into optimal growth strategies. Some angel investors specialize in specific sectors, leveraging their knowledge and experience to benefit your business. Nevertheless, investments may not be exclusive, as their portfolios are often diversified across multiple organizations.

VENTURE CAPITALISTS: These investors seek companies with demonstrated growth potential and, in exchange for equity, provide support without the obligation of repayment. Venture capitalists are crucial for SMEs without access to equity markets for capital raising, especially businesses on the cusp of commercialization. While they can provide valuable insights and build a network for your organization, they also hold stakes in your company, potentially complicating future shareholder arrangements.

CROWDFUNDING

Crowdfunding, a quite recent investment concept that originated in 1997, has become essential for many startups and growing SMEs. It operates by having individuals interested in your company's product or service make donations to a campaign. If the campaign successfully reaches its target amount, backers expect a small favour in return for their support, with the nature of the favour often linked to the donation's size and explicitly outlined in the campaign.

Crowdfunding campaigns can significantly increase brand visibility and attract attention during the campaign. Like bootstrapping, the funds received are entirely under your control, without the need to share equity. However, there is a high rate of failure for crowdfunding campaigns, and failed campaigns can potentially harm your company's reputation.

Whichever route you choose, be prepared for a thorough due diligence process by potential funders. At the very least, you should have audited accounts ready, well-crafted forecasts, and a compelling story that excites potential investors.

?In the quest for investment, clarity is paramount. Understand your strategy and potential pitfalls before seeking internal or external investment. In the end, comprehensive planning is the most effective way to mitigate risks and ensure success. Ensure you have a deep understanding of every aspect of your business, pinpointing the elements most likely to secure your future success. This way, investment becomes a powerful catalyst for your business's success.

I hope the above helps you and as always please feel free to ask for any advice.

Many thanks,

Darren Earney

www.elevateom.com