What are the different types of investors?

What are the different types of investors?

There are two main categories: Equity and Debt.

Equity investments are made in exchange for part-ownership or ‘equity’ in the recipient company. Debt investments are what we normally think of as a loan. An investor may offer either or a combination of both types.

Equity investors realise a return by selling their share of the company for more than their original investment. Loans are returned by regular repayment at agreed interest rates.

Debt investments are nearly always secured against assets within the business, but equity investments are only rewarded by the resultant ownership of the company. Thus, equity investments are seen as higher risk than traditional debt finance. The higher the risk of the investment the greater return sought by the investor.

In practice most investment deals combine both equity and debt.

What about grants? These are state-funded donations with no repayment requirement, awarded according to strict criteria and aimed at supporting and/or stimulating particular areas of the economy. Due to their limited availability they are best viewed as a bonus: it is unlikely you can rely on them and so they shouldn’t form any part of your long term business growth strategy.

Who could provide the money?

Equity:
  • you, your friends and family
  • business angels
  • venture capitalists
  • venture capital trusts
  • public listing
Debt:
  • bank (overdraft or loan)
  • invoice discounters
  • asset-based lenders

You, your friends and family

Equity

This should always be your first port of call for funding, for several reasons. It shows your commitment to the business to clients, employees and most importantly future investors. Your friends and family know you best and the terms should be less punitive – unless of course you’re related to any Dragons from the Den!

Business Angels
Equity

This is usually the next option. Business Angels are wealthy individuals looking to invest in small companies. Think of them as friends and family you’ve yet to meet. They normally invest for one or more of these reasons:

  • financial – to make more money by backing the right business
  • altruistic – to give back to their industry, or small business in general
  • lifestyle – it appeals to their sense of self, status and purpose.

Some invest in a ‘hands off’ manner; others want to get involved. A good business angel will bring much more than money to the table. They can share a wealth of experience and contacts. They often take a non-executive position within your company, providing a sounding board and source of support during the good times and bad.

The terms of the deal are likely to be more demanding than with friends and family but Angels are likely to have considerably more impact on your business.

Business Angels are typically involved in deals in the range £50,000 to £1million. Deals can be done by one or several individuals, or an ‘angel network’. They can also be syndicated with other investment proposals.

Angels often invest alongside the more institutional investors such as venture capital firms and banks.

Finding business angels can be challenging but angel networks are a very good place to start.

Venture Capital
Equity

Whereas angels may have a range of reasons for investing, VCs are companies with shareholders and employees, so their focus has to be making money. They invest across a wide range of sectors, in any business that looks most likely to make them money.

They have far deeper pockets than most angels, so they can support much bigger deals.

Many VCs manage public money designated for supporting business growth in certain regions or industries, so it’s good news if your business qualifies. But remember, these aren’t grants and the final decision is still based on your chances of success.

Some VCs can also help to recruit new members to your management team if necessary.

The more evidence you can give that your company will grow substantially with the right investment, the greater the chance of securing funding. VC-backed deals are usually in the region of £250k to £2million. There are a number of venture capital firms in the East Midlands.

Venture Capital Trusts
Equity

VCTs are pots of money raised by financial institutions from retail investors. To the retail investors it is a financial product, like a pension fund, but in practice it invests in stocks and shares of much smaller companies. VCTs mostly operate in the same bracket as venture capital firms, but the terms and type of investment varies greatly depending on the structure of the trust.

Public Listing
Equity

Public listing is when a company makes its shares available to the general public by becoming listed on one of the stock exchanges. It is typically for large, established companies rather than those in the running for growth investment. It is, however, a common way for investors to realise their investment once a recipient company has grown successfully.

Bank –overdraft/loan
Debt

Bank overdrafts can vary from a few thousand pounds to hundreds of thousands. They are often used to overcome short-term cash flow issues. Although interest rates tend to be higher, there’s the advantage that you’re only paying interest on the money you actually need.

Bank loans are for longer-term lending. You get the money under the terms of the loan upfront, or in stages, with a fixed or variable rate of interest.

The bank will ask for some form of security for the overdraft or loan; either a personal guarantee or a charge over the assets of the business. Your bank manager can talk you through the options.

Invoice Discounting
Debt

This is a different approach to increasing the amount of ready capital in your business and is ideal if you’re affected by cash-flow issues caused by large or delayed invoice payments.

Invoice discounters advance you an agreed percentage of your invoices for a fee and interest on the money advanced. They may manage your debtor book for you, freeing you up to focus on your business. This service is offered by many banks, and other providers that specialise in this field.

Asset-based Lenders
Debt

Asset finance is used to buy fixed assets such as vehicles, plant and machinery and office-based equipment, so the money doesn’t have to come out of the company’s cash flow. Asset finance is available to early stage as well as established companies. Terms vary depending on the company and the assets. To find out more speak to the specialist lenders.

Property Loans
Debt

If you own property, you may be able to raise funds by mortgaging the property to a bank or other lender.