Coming up with an incredible money-making idea is one thing, but finding reliable business funding is an initial struggle for most entrepreneurs. And you often can’t run your startup without some financial backing at the beginning.
If you’re a little bit stuck, or don’t know where to start, here’s how to get funding for a business in the UK. We’ve also included the pros and cons of each capital-raising method to help you weigh up the decision for your startup.
BoostrappingBootstrapping is one of the most common ways of getting a business idea off the ground. It involves using your own money until customer sales are high enough to be making a profit. These funds often come from personal savings, low or no interest credit cards, or mortgages, which can become risky if your business idea doesn’t pay off. Basically, gaining money without the help of venture capital or angel investors.
Another common way of bootstrapping your business funds is to work a full-time job and run your startup part time. This is a lot less risky because you’ll always be able to fall back on your job and you’re not going to work up a lot of debt.
Here are the two main stages of bootstrap funding:
• Seed money – using your personal money to start the business
• Customer-funded money – you’ll reach this stage when customer sales fund your business, rather than your own pocket. This funding then gets pumped straight back into the business.
Pros: If you opt for angel investors or venture capitalists, you end up losing some control of your startup because they’ll get a say in important business decisions. Because you’re self-funding, you have full control.
Cons: If your business doesn’t succeed, you’ll have used your savings on it or could end up in a substantial amount of debt that you’ll need to manage. To avoid this personal risk, we’d recommend starting your business as a side hustle.
Applying for a Government LoanGovernment-backed start up loans are another popular option for the financial backing of a business. This involves submitting an application, and if this is successful, you’ll then be assessed for your loan based on how strong and viable your business plan is and whether or not you can afford the loan and repayments.
If approved, you’ll be able to borrow between £500 and £25,000 (although the average loan amount is £7,200).
Once you’ve agreed to the loan, you’ll be invited to receive 12 months of one-to-one business mentoring.
Pros: As well as the security of a fixed interest rate, you won’t be charged a fee for early repayment. A lot of schemes also offer a first-rate business advice or mentoring service, including support with business plans and cash flow forecasts.
Cons: Unlike bootstrapping or receiving a grant, you will have to pay your loan back over 1-5 years. You could end up in debt if you don’t make your repayments in time.
Applying for a Bank LoanBank loans are another traditionally popular funding route for startup entrepreneurs. Banks, such as Barclays, allow you to borrow up to £100,000, with up to 20-year repayment terms. For smaller loans, you can even take a ‘6-month repayment holiday’ so you can set your business running before paying anything back.
Pros: You can apply for a much larger loan with a bank as opposed to government schemes. You can also opt for longer repayment terms on larger loans. The interest rate on these kinds of loans is often lower too!
Cons: As well as a strong credit score, applying for a bank loan involves lengthy paperwork and often a longer wait time as you’ll be waiting for approval. They also aren’t very flexible – you’ll still need to make your repayment whether you’ve had a good month or a bad one.
Applying for a Small Business GrantSome businesses are eligible for grants. This is a form of fund awarded by the government to certain UK small businesses. To be eligible, your business might be necessary to supporting the local economy in a specific area.
Pros: The biggest pro of small business grants is that you don’t have to pay them back. A lot of the ones on this list will match a certain percentage of your own funds to give you that last boost you need to launch your startup.
Cons: There may not always be an opportunity for your business in your local area, or a grant that covers you. You will also need some funding from elsewhere before you can be considered for a grant.
CrowdfundingCrowdfunding is becoming an increasingly popular way to raise capital for new startup businesses. There are loads of websites available to entrepreneurs who don’t want to go down the traditional route of applying for a bank loan.
A crowdfunding campaign aims to raise finance by asking a large number of people each for a small amount of money. This can be in return for certain benefits, such as early access to products before they’re released to the general public, or under agreement that the debt will be paid back with interest.
Popular crowdfunding websites include CrowdCube and UK Crowdfunding.
Pros: Crowdfunding has possibly the lowest level of risk of all these methods. Before you start the campaign, you won’t need to invest much personally and therefore don’t lose anything if you don’t meet the deadlines.
The people who’ve invested in your company are also likely to become your biggest fans. They can shout about the startup and build excitement on social media or mouth-to-mouth communication.
Cons: To receive the funding, you’ll need to set an intended target and complete this within a deadline. If you don’t meet the deadline, you won’t receive any money and may have to start your campaign all over again.
You’re also obligated to keep investors informed of any delays in delivering what you’ve promised – and return the money to them if you fail to meet the deadline.
Securing an Investment
If your company or funding proposal meets certain conditions, you could be eligible for one of the government’s venture capital schemes, such as Seed Enterprise Investment Scheme (SEIS).
These schemes allow you to attract investment, but there are certain rules around who can apply. Your small to medium sized business must:
- have a permanent establishment in the UK
- carry out a trade that qualifies
- plan to spend the investment on a qualifying trade
- not be listed on a recognised stock exchange at the time of investment
- not be controlled by another company
These schemes allow individuals to buy and hold new shares, bonds or assets over a specified time.
Alternative ways of securing investment would be to find an angel investor. There are numerous websites aiming to connect UK entrepreneurs with angel investors. These investors are normally successful company founders and are looking to invest in and build a relationship with entrepreneurs for a certain percentage of the business’ profits. Here’s how to create a winning investor pitch.
Pros: Depending on the scheme or investor you choose, you can raise between £150,000 to £12 million for your business, which is a significant amount of money for any business, especially SMEs.
Cons: Shareholders will have some say in your business’ decision-making processes. This means you’ll be letting go of some of the control of your company. There’s also a lot of paperwork involved, meaning it could be quite a lengthy process.
Asking Friends and Family
Sometimes, the biggest supporters of your new startup will be your friends and family. They’ll often be more than happy to lend you some money to help fund your business and won’t demand you pay back with interest.Pros: Your close ones are often more than willing to offer to help with funding, won’t ask for a huge amount of interest, and can be a lot more patient than banks and professional investors.
Cons: If things don’t turn out as you plan, this could end up souring some of your closest relationships – which is often a bigger loss than the losing the money itself.
Our top tip? Have a business plan at the ready – that way you can explain what products/services you’ll be selling, how you’ll make money and the general structure of the business. Make sure you can explain all of this face-to-face; they might not want to sit and read through a 5-6-page document.
Funding your business can seem like a daunting task. But if you’re passionate about your business and are willing to weigh up the pros and cons of each funding method, you’re already taking step towards growing your startup. We wish you all the best with your endeavour. Get more help and advice for your SME over on our Think Big blog.