If you’ve decided to bring your business dream to life, we have some good news for you. It’s never been easier to get funding for new business ventures. You don’t have to go cap in hand to the bank if it doesn’t suit you. Options range from crowdfunding, government loans and grants, to angel investment and private startup loans.
It’s up to you. If you want to start off small and keep control of your business, family and friends may be the best bet. If, however, you’re the next Musk or Zuck, venture capital funding may be the route for you.
According to the government-backed Start Up Loans Company, there are 10 essential questions you need to ask yourself before applying for funding.
- Have you written a business plan?
You won’t go far without a written business plan. It helps to clarify your business idea and identify any potential problems. If you need help writing your plan, here are some useful sites: https://startups.co.uk/how-to-write-a-business-plan/
- Do you have proof of any sales or contracts in your business plan?
You’ll have to verify them with proof, such as a copy of the contracts.
- Is your business plan up to date? And have you reviewed the content?
Things may have changed since you began work on your business plan, so keep it as up to date as possible.
- Have you prepared a cash flow forecast?
This is essential for anyone assessing whether to lend or grant you money. So make sure you include all of your costs and your revenue streams and most importantly, be realistic. According to Barclaycard, “investors and analysts will look at cash flow closely before investing in a business is because it’s very difficult to manipulate.” One of the main reason for business failure is erratic cashflow. If you need more guidance on preparing a cash flow forecast, this may help: https://startups.co.uk/how-to-create-a-sales-forecast-for-your-business/
- Does your business plan match up to your cash flow forecast?
Make sure that the numbers match on your business plan and in your cash flow.
- Have you got a Personal Survival Budget?
Work out the absolute minimum that your business needs to make to support you. It’s called a Personal Survival Budget. Use a website such as the Money Advice Service together with your bank statements. You might be surprised at how much you actually need.
- Do you know the industry you are looking to enter?
Have you done your homework? Do as much market research on everything, ranging from your products or services and competitors,to your potential customers and pricing.
- Can you demonstrate that you have managed your existing debt, hire purchases and bills?
You may need to show that you can manage finances to the bank or investors.
- Do you have an exit strategy?
Not all startup businesses succeed. If you can demonstrate that you have a plan B or contingency plans, you’ll improve your chances of getting funding.
- Finally, can you say exactly what you need the funding for?
Provide a detailed breakdown of what you need the money for, with quotes if you have them. It shows that you’re in control and know what you need.
That’s it. Now all you need to do is decide on what type of finance you need to get up and running. A useful source for business ideas, advice, inspiration, suppliers and seed funding is: Startups.co.uk.
Here are 8 types of finance for startups, with pros and cons, for you to consider:
Until the Credit Crunch, banks were the main source of finance for most business startups.
You really have to know exactly what you want and have it all in writing before you start pitching for a bank loan.
It’s not all one-sided though. You can and should shop around for the best deal. Bear in mind that you don’t have to apply to the same bank you use for your personal account. And bear in mind that your business has a totally separate credit rating that doesn’t affect your personal one.
UK Finance, (https://www.ukfinance.org.uk/area-of-expertise/commercial-finance) the collective voice for the banking and finance industry, which represents more than 250 firms, offers balanced advice on the loans currently offered by Britain’s banks.
- If you have personal bank account with a good credit record over many years and have a low-risk business plan, you have a reasonable chance of getting a business loan from your bank.
- Unlike some lenders, banks can offer very large loans, if you meet their financial criteria.
- There has been a fair amount of criticism in recent years about the banks’ lack of appetite for risk-taking, particularly when it comes to startups.
- Banks have strict lending criteria.
- They may insist upon lending secured on your assets, such as your home.
- Unlike some lenders, banks are generalists, which often results in slow decision-making on loans.
Friends, family and your own money
Self-funding, or using your own money and that of friends and family is known informally in business as ‘bootstrapping’. You may get some, if not all the capital you need this way.
To make sure that there are no future misunderstandings, make sure that you get legal advice and put everything in writing, particularly if friends or family might incur any financial liabilities.
For your own peace of mind and theirs, behave professionally and present them with a business plan and forecasts.
- Friends and family are usually more flexible than external lenders when it comes to servicing your loan debt.
- Little or no bureaucratic obstacles.
- The loan isn’t likely to be secured on your assets, such as your home.
- Circumstances can change and friends or family may desperately need their investment before the agreed payback period.
- Future relationships could be strained if the venture fails.
- Bootstrapping doesn’t usually work for large-scale, capital-intensive startups.
Crowdfunding is a way of raising finance by inviting a large number of people to invest small amounts of money individually. There are three different types of crowdfunding: equity, donation and debt.
- Equity crowdfunding is when people invest in your company in exchange for shares or a percentage of the business.
- Donation crowdfunding is when people donate money to your venture because they believe in you and your business idea. They don’t want their money back.
- Debt crowdfunding is when people lend you money with the expectation of receiving their money back with interest.
For more details on which platforms offer what, see the UK Crowdfunding Association: https://www.ukcfa.org.uk/
- Crowdfunding projects are promoted to the public, which means you get free publicity and marketing, together with finance for your business at the same time.
- It reduces the size of the overall investment required into easily affordable amounts, which appeals to small investors.
- Venture-capitalists keep tabs on many crowdfunding projects and, sometimes, step in as the business progresses.
- Competition can be heavy on many crowdfunding platforms, particularly if someone is pitching the same business idea as yours.
- Because crowdfunding is so visible, there is always a danger that someone else will be ‘inspired’ to promote a similar business idea on another site relatively easily and quickly.
- With most platforms, if you don’t reach your target amount, all money must be refunded to the investors.
Angels invest an estimated £850m annually in the UK, making them a really significant source of funding for startups. Angels each invest between £5,000 and £100,000.
There are two types of angel, individuals and groups. Individual angel investors are very rich people who don’t answer to anyone else and therefore invest in whatever interests them. Group angel investors (no, not a host), are like-minded individuals who combine their assets to invest in business proposals.
Angels make their own decision about the investment, and in return for providing personal equity they take shares in the business. They can’t take more than 30% equity in your business under the EIS/ SEIS scheme. In addition, they usually ask for an ‘Investor Director’ to represent them on your board.
You can find angels independently, using LinkedIn. Or get in touch with an angel network, who generally charge between 5% of 8% of the funds raised, for making introductions. These include: https://www.angelsden.com/, https://www.ukbaa.org.uk/, https://www.angelinvestmentnetwork.co.uk/
- Angel investors very often offer startups valuable mentoring in addition to their capital.
- Many are willing to take a high degree of risk if they believe in a business idea.
- By comparison with venture capitalists, angels usually invest less.
- They usually expect a high return on investment (ROI).
Venture capital funds are managed by professionals who are always on the lookout for startups with great prospects. Their money comes from a wide number of sources including: corporations and individuals, private and public pension funds and foundations.
Unlike angels who usually invest in thousands, venture capitalists normally deal in millions.
They usually take shares and have a say in the future of the company and its running. In time, they sell their shares in the company back to the owners or through an initial public offering.
- If you want to raise a large amount of startup capital, in the millions, venture capital is a good option.
- They monitor the progress of companies they invest in, which ensures sustainability and growth.
- The mentorship and expertise they offer can be useful help sustain and grow a business effectively.
- Venture capital investors usually operate on a short, three to five-year timeframe to recover their capital and profits.
- You can lose control of your business, as you’ll have to give up a large slice of it to them.
- Venture capital investors are more risk-averse than say, angels, because they invest money on behalf of the fund, which has to be profitable and make a high return for the fund’s investors.
Government startup loans
The UK government aims at boosting the UK economy by offering loans to aspiring entrepreneurs, through its Startup Loans scheme.
The average loan is £7,200, but each owner or partner in a business can individually apply for up to £25,000, with a maximum of £100,000 available to the business as a whole.
The loans are government-backed and charge a fixed interest rate of 6% per year. You can repay the loan over a period of 1 to 5 years. There’s no application fee and no early repayment fee. The loan is unsecured, so there’s no need to put forward any assets or guarantors to support an application.
In addition to finance, successful applicants receive 12-months of free mentoring and exclusive business offers to help them succeed.
The government-backed Startup Loans Company provides funding and free mentoring support to help start your business. They work with a network of what are called ‘Delivery Partner’ organisations which support loan applicants in all regions and industries throughout the UK.
Delivery partners provide applicants with both pre and post-loan support. This means that they initially help you to prepare and submit the following documents: business plan, cashflow statement, your personal survival budget, three months of your current account personal bank statements and your CV.
If your application is successful, they then provide post-loan support in the form of ongoing mentoring support.
All Delivery Partners offer the same loan terms; however the method of pre- and post-loan support varies between partners. The Startup Loans Company closely monitor all Delivery Partners to ensure consistent quality of delivery.
- The terms are very favourable compared to traditional lenders.
- The loan is unsecured, so you don’t need any guarantees or guarantors to support your application.
- You get 12-months of free mentoring and exclusive business offers to help you succeed.
- Bear in mind that the loan is personally owed by each individual borrower, not the business.
- Owing to government bureaucracy, the process from presentation, approval and eventual release of funds may take a long time.
Private startup loans
A number of private companies also provide startup loans. For a list of the top ten according to Money, take a look at their site: https://www.money.co.uk/business-loans.htm
One well-known private startup company is Sir Richard Branson’s Virgin StartUp.
This is a personal loan for entrepreneurs wanting to start their business. The loan offers the following:
You can borrow between £500 to £25,000 per co-founder – average loan size £10,000. This is spread over 1-5 years at a fixed rate of 6% p.a. And there are no set up fees or early repayment penalties.
In addition, each funded entrepreneur receives twelve months of exclusive support as part of The Funded Club. Including;
Expert guidance to help you start and scale your business.
A dedicated business advice helpline.
Regular opportunities to meet with specialist mentors.
An experienced mentor who’ll work with your business for six months.
To find out more visit: https://www.virginstartup.org/start-up-loans
- With an interest rate of 6.17%, the terms are reasonable.
- The loan is unsecured, so you don’t need any guarantees or guarantors to support your application.
- You get 6 months of free mentoring and a business helpline.
- You get promotional, marketing and PR opportunities at Virgin StartUp, are featured in content on their website and presented at their events.
- The loan is personally owed by the individual borrower, not the business.
Government and local authority startup grants
The government allocates a portion of taxpayers’ money each year to put towards business grants and funding new enterprise. Startup grants are non-repayable lump sums made available to businesses.
As you’ll see, there are hundreds of grants to choose from, many of which are limited by a business’s size, sector or location.
Government grants are often complex and involve lots of processes, stages, and different criteria for applying. Most small business grants are awarded to help launch a startup or new business, with the aim to generate jobs and stimulate the economy.
The money is distributed through national and local organisations and local authorities who decide if you’re eligible for funding.
For a full list of government grants check out the government’s business finance support finder: https://www.gov.uk/browse/business/finance-support
- Grants vary in terms of value, but most will match the amount you personally invest.
- Owing to bureaucracy, the process from presentation, approval and eventual release of funds may take a long time.
- Most grants will only match the amount you’re also willing to invest, so if you’re seeking a grant of £10,000 then make sure you’ve a matching amount available.
Private startup grants
A number of private organisations also provide startup grants, such as The Prince’s Trust. The trust has given financial assistance to young entrepreneurs since 1976.
It offers an exclusive Enterprise Programme that provides grants and mentors to young individuals between 18 and 30 years old. The grant is £1,500 for individuals and £3,000 for a business group. A small test marketing grant of up to £250 is also provided to individuals, to help them evaluate the market value of their product.
Other grants include:
- The Smart Grants scheme, which provides grants for startups researching and creating significant technological or scientific breakthroughs. They offer funding between £25,000 and £250,000.
- Heritage Lottery Fund Startup Grants are only offered to individuals running a non-profit organisation or entrepreneurs who are going to start a new business. It takes eight months to process the application and there is no funding limit specified.
For a list of small business grants in the UK, take a look at The Entrepreneurs’ Handbook: https://entrepreneurhandbook.co.uk/grants-loans/
In terms of pros and cons, these vary by organisation.
If you don’t have sufficient personal funds, the answer may be to take a mixed approach to funding. Use some of your personal funds for seed capital, for research and business plans and combine that with enough equity funding to give a bit of cash but not too much to lose control (and profits) in the long term.
As you can see, you have a wide number of options open to you. We hope you find the right finance package to suit you. And best of luck with your new venture.