How to fund your start-up business
Picture the scene: you have a whole business plan for your start-up. The idea is perfect and the product fits a niche you’ve found in a specific market sector. You’re all ready to go, but there’s just one problem – how do you find funding?
Every year around half a million entrepreneurs in the UK start a business. And while a large number succeed, stats show that 60% of start-ups o under within three years. According to the UK Government report ‘Business population estimates for the UK and regions 2021’ in October 2021, there were 5.6 million active small businesses.
Is it easy to fund your start-up?
Funding a start-up isn’t easy, but there are lots of avenues to explore in finding the money to kick-start your business venture. I’ve had a look through the funding options in the UK, from crowdfunding to business loans. Here are just some of the ways you could find funding for your start-up business.
Getting a start-up loan
A business loan for your start-up is an obvious route to try. These are highly sought after by entrepreneurs wanting to get their venture off the ground. And they can be the crucial difference between success and failure.
However, for businesses that are untried and untested, it can be difficult to find a loan. With no records to show as proof of success, the loan would be a risk. While you can mitigate this worry for the lender by creating a robust and workable business plan, it’s likely that private lenders will still want to see proof of sales.
You could turn to the Start-Up Loan from the Government as an alternative route. Available as an amount of £500 up to £25,000, this is an unsecured personal loan. This means that the individual entrepreneur or start-up owner will be liable to pay it back.
If you are successful in applying for this, it does come with access to guidance helplines and sometimes mentoring. The longer your business has been operating, the more options there are in terms of loans.
Securing a line of credit
Obtaining a credit facility means borrowing money under a flexible system that suits the changing needs of a small business start-up. It’s designed to pay for overheads and outgoings on a short-term basis as the business launches.
If you are accepted by the provider, then the idea is that you can use the fund flexibly as you needs evolve. It’s generally a form of unsecured lending. This means it’s not secured against an asset. A personal guarantee must be signed and, again, the person who signs it is liable for paying it back.
Obtaining a grant
The Government offers a number of different grants for start-ups and new business ventures. You can find a rundown of the kind of grants offered at gov.uk/business-finance-support.
Grants can help reduce the costs of starting out, or they can be used to help out a business that is already growing. However, applying can be complex as each separate grant comes with different criteria for qualifying.
Obviously, the larger the grant on offer, the more complex it is to be accepted. In order to apply for these kinds of grants you must have a valid business plan in place, a fully scoped usage plan for any funds granted, another funding stream available and plenty of time to accurately assess the criteria.
Government schemes can be split into three forms:
- Direct grants – funding to pay for a start-up’s initial costs, such as wages, investing in stock or purchasing equipment.
- Equity finance – this isn’t technically a grant, rather it’s a reduction in income tax on investing in a new business (up to £100,000).
- Soft loans – these are basically business loans with lower interest rates, such as the previously mentioned Start Up Loan scheme.
Crowdfunding for your start-up
You could, of course, try alternative funding methods such as crowdfunding. There are many different forms, but the basic idea is that you post your business plan to a crowdfunding platform and try to get the community to fund it.
People can contribute through equity, lending money, donating or as a rewards-based system. Whichever platform you choose, you’ll have to have a plan and proof of concept that appeals to the maximum number of potential investors/donators.
Specificity is key here and a creative approach is necessary to inspire people to want to fund your professional venture.
Venture capital and angel investment
Angel investors can be from many different sectors and don’t necessarily have to be backed by large Venture Capital (VC) platforms. They just need to be someone who believes in your business and who has the cash to fund – or part fund – its development.
The ideal Angel Investor is one with the money and the business acumen, contacts and experience to help you develop your start up. They will usually invest in exchange for a stake or shares in your business – think Dragon’s Den.
VC funding is different, in that it usually involves much larger investments in fast-growing sectors, such as technology. This means that you’ll need to get a whole firm behind your idea, rather than a single Angel Investor. They’ll be looking for proof of potential for long-term growth and will want a stake in your business.