There’s so much attention on ethical, sustainable businesses it’s easy to lose sight of the cold commercial reality of business. Whether you’re developing a new product or transforming your established business, you’ll quickly run into problems if you don’t have the money to pay for it.
For a green business, the demands on limited money can be great. Higher material costs, paying for certifications, increased recycling costs can all drain a bank account faster than expected. There are few short-cuts available and with financing there’s little point in high-lighting the green credentials of your business if you’re funded by the same sources as polluters.
Traditional financing can be difficult for sustainable businesses. Knowing where money is coming from is important in being able to demonstrate a true cradle-to-cradle ethical stance. Fortunately, there are options available that can connect you directly with those who are committed to your vision and willing to help fund it.
A business loan from a green bank
Borrowing from a bank is probably the most familiar and comfortable option for raising funds. Lending to small business has been falling in recent years, partly driven by concerns about the economy and uncertainty around Brexit. If the pot of available funds was getting small, its shrunken further for green businesses looking for ethical banks.
Although there is a lot of interest in ethical banking, so far it hasn’t materialised as a significant market beyond business current accounts. Co-Operative Bank and Triodos are two ethical banks that offer business lending from ethically backed facilities.
An alternative to bank lending is the “peer-to-peer” model popularised by Funding Circle. The original idea was you’d ask to borrow an amount of money and individuals decided how much to lend and on what terms. This has been changed in recent years so that the investor money is pooled and the platform decides what to offer and how.
For an ethical business this can present a challenge as the source of the money isn’t known. This has been made more difficult by the platforms appealing to institutional investors.
Various governments and NGOs offer grants that could part-finance growth. These schemes vary from being highly targeted to one specific area to more wide ranging financial and advisory support. Surrounded in rules and mythology, it can take considerable time to find the right grant, let alone apply for it. Applying can often be complex and time consuming, which is why an entire industry of specialists has risen to support companies find, apply for and manage their grants.
It’s unlikely you’ll secure all the funding you need through grants, nor certain you’ll win one. However, you’re unlikely to have to repay it, so the funding can act as a welcome additional boost. Given the uncertainty in securing funds, it’s advisable to plan and secure funding as if the money wasn’t available.
Once you’ve secured a grant, it can seem like you’ve won “free money”. They come with strings attached, and it’s never advisable to use it for any purpose other than what it was awarded it for. Not only could you end up having to pay it back, you might also face prosecution for fraud.
The “kindness of strangers” has allowed some successful businesses to start out with modest amounts of funding sourced from many different people. This is crowdfunding, where you offer up your business idea and ask people to support it with donations or pre-orders. It can be an effective way of generating both advanced funding and buzz around your brand and business idea.
As with grants this is not “free money”. Supporters will expect something in return. This could be merchandise if you have a strong brand visual, or a promise of a product once you’re ready to go to market.
You need to plan your crowdfunding campaign carefully if you’re to maintain interest and offer enough of a promise to get supporters. Drip feeding campaigns is usually more effective than going in with a “Big Bang”, and it can be better to hold back until you have a proof of concept to show people rather than try and sell an idea alone.
Bonds are promises to lenders to repay a debt in full on a specific date with a specific amount of interest. Interest in “green bonds“, which are specifically to support sustainable or socially responsible projects, has been grown steadily as investors look for reasonable returns that support the greening of the economy.
Unlike loans, bonds don’t have to be repaid in part each month, which can help working capital. However, when they fall due, it can cause a lot of financial pain as large amounts of money will flow out of the business at once. If your business hasn’t been as successful as you planned, or you’ve not been able to secure alternative funding, you could find your company insolvent and out of business.
As a financial product, bonds are tightly regulated. They can be expensive to set up, market and manage, placing stringent demands on financial and other reporting. However, they also demonstrate maturity and confidence in the business, which may make it attractive to investors and markets alike.
Bring in a private investor
If your business is incorporated (that is, it has shareholders) you could sell shares to investors. In exchange for a share in future profits and a say in how it’s run, an investor puts money into the business. How much and what type of investor depends on the value of the business and how much you will sell.
Smaller sales are likely to be attractive to so-called individual “angel” investors. As the amounts increase, you may find private equity or venture capital funds take an interest. Either way, it’s always advisable to take professional advice before you commit to any sale.
Bringing in an investor has side benefits beyond funds. Choosing the right one can give you access to networks and experience that can help your business. An engaged investor will also provide oversight that will keep you focused on delivering your business plans.
When you sell a share of your business, you need to remember another person has a say. You may retain a majority shareholding, but carrying on as if they don’t exist is a surefire way to alienate them. While it’s unlikely they’ll undermine the business, you won’t benefit as much from their experience and networks as you might have done.
Whether you’ve borrowed money, secured crowdfunding or brought in an investor, at some point you’ll need to repay the debt. Banks will want loans repaid, crowdfunding supporters will want their pre-ordered products and investors will want to see returns.
There’s only one way to repay this debt – make sure your business is a success by delivering against a sensible, robust business plan.
Securing funding for your sustainable business isn’t easy in the current climate. There’s limited choice at the main banks, while regulation seems to have dulled the potential for peer-to-peer lending to connect socially responsible businesses with investors of the same mindset. Crowdfunding or selling a share of the business appear to be the most viable ways of raising funds.
Whatever route you take, it’s important to have a strong business plan, and to get professional advice before you sell shares or commit to long-term debt.