Funding options: loans, grants, equity

Lesson 10 of 13 in our free Business Money Advanced guide: a 5-minute money game with the key points below.

This lesson is in the full version.

Free with a code from your uni, college, council, landlord or employer (worth £600/year). Lesson 1 of Business Money Advanced is free for everyone.

Questions you'll answer

Illustration: an investor puts £100,000 into a business valued at £400,000 before the investment (pre-money). What percentage do they own afterwards?

A Start Up Loan of £10,000 at a fixed 7.5% a year over 5 years costs about £200 a month. Roughly what's the total repaid?

Repaid monthly with interest, and you keep 100% of the business → Loan. That's how loans work. Miss payments and there are consequences.
An investor gets 20% of the company in return for cash → Equity. Equity: no repayments, but you've given away a share of future profits and control.
Money you don't repay, if you meet the scheme's conditions → Grant. Grants usually have rules on what you spend it on, and are competitive.
A government-backed personal loan for business with free mentoring → Loan. That's a Start Up Loan: £500 to £25,000 at a fixed 7.5% a year, repaid over 1 to 5 years. Still a loan, still personal.
Red flag: “Dear business owner,” — A generic greeting: they don't even know who they're writing to.
Red flag: “We've reviewed your café plans and would like to invest £250,000 for just 5%.” — An offer before seeing any accounts, at a sky-high valuation, is bait.
Red flag: “To release the funds, please first pay our £1,500 due diligence fee” — Real investors don't charge you an upfront fee to receive their money. This is an advance-fee scam.
Red flag: “by bank transfer within 48 hours” — Pressure and an irreversible payment method.
Red flag: “and keep this offer confidential from your accountant.” — Secrecy from your advisers is a classic scam move.