Starting a new business is an exciting but nerve-wracking time for anybody. You naturally want to succeed and begin on solid foundations that ensure the longevity of your company, but this means getting enough funding to cover your expenses and kickstart your operations. Unfortunately, securing finance is often the biggest obstacle that a start-up will have to face.
The key to obtaining the capital you need to launch your business is understanding the financial options on the market and identifying one that suits your needs.
The good news is that there is help available for businesses seeking the funding they need to take the plunge. We have listed the top sources for new business funding in the UK, so you can find the support you need.
- Bank loans
- Family and friends
- Personal investment
- Business angels
- Venture capital
- Crowdfunding
- P2P lending
- Grants
- SEIS/EIS
- Commercial mortgages
- Incubators and accelerators
Bank loans
Bank loans are one of the most traditional ways of funding a new business. In the modern age, many banks have schemes specially created for start-ups, making getting a loan more accessible for younger firms.
Banks tend to be risk-averse, so to succeed in securing finance, you will need to prove the validity of your idea. This means presenting supporting documents to the lender, such as business plans and financial forecasts that prove you are likely to fare well in the market and can be trusted to repay the loan as agreed.
There will also be options to secure your loan with assets or a personal guarantee, which can enable you to access more considerable sums of money and mitigate the risk.
Alternative lenders might be more inclined to support higher-risk businesses or those with bad credit, though there will usually be a pay-off, such as requiring security or high-interest rates.
The Start Up Loan Scheme is another option with amounts up to £25,000 per directors.
Family and friends
If you are fortunate enough to have people willing and able to help, asking your family and friends for the cash to start your company is a great option. It will often provide the first step for your business, giving you some capital to get things moving before you pursue external finance. However, in most cases, you will likely be limited in the amount you can raise.
If you are relying on friends or family to fund your start-up, it’s essential to create agreements with everyone that detail the expectations of each side and how and when the other party will be repaid. This will prevent damage to your personal relationships.
Personal investment
Another option if you have enough savings is to put your own money into your start-up. However, this should only be done if you are comfortable with your personal finances and willing to take the risk.
Some entrepreneurs might start small, such as working from home or producing limited products, using their own money. If all goes well, this can be enough to begin to generate an income that can be reinvested in the growth of the business while enabling you to build an established reputation in the market.
Business angels
An angel is an individual with a high net worth who wants to invest in promising new enterprises to generate a favourable return on investment. Due to this, they can be a useful source of finance for any company that wants to pursue equity funding and can capture the interests of an angel.
Angels offer substantial funding for a new business – up to £500,000 or more in some cases. They may also provide hands-on guidance that supports your start-up, especially if they have expertise in your industry.
However, you will need to work to convince an angel that your business is worth investing in, which means networking to identify an appropriate investor, preparing a compelling pitch and delivering a ROI in three to eight years. You also must be ready for the angel to influence your company, which will only end when they step away – which usually requires an exit plan.
Venture capital
Another form of equity finance is venture capital. A venture capital (VC) firm will invest from a pool of funding from various investment sources. They will then place this into promising, early-stage companies to deliver return on investment, usually at a minimum of 25%.
The advantage of VCs is that they are willing to work with higher-risk businesses, as long as there is the potential for high reward and growth. It’s also usually a solution for a set timeframe – most venture capital funds have a time limit, so you can expect that they will look to exit and receive their ROI and before the end of this period.
However, the acceptance rate by VCs is low, so you will need to work hard to persuade a VC to back your business. Again, this means having supporting evidence that demonstrates the value of your ideas, such as a pitch deck, business plan and financial documentation, while convincing investors to work with you.
Crowdfunding
Crowdfunding is an alternative form of finance that has risen in popularity in recent years. It sees multiple contributors place a small amount of money in your business, which pools together to create a larger pot. Often, this will be done in exchange for equity, though some may be willing to donate for other incentives, like rewards or towards a charitable cause.
Crowdfunding will not be for everyone. It only works with specific enterprises: for example, those that fill a niche, serve public demand or have a charitable/for-the-greater-good purpose. You’ll also need to create a buzz around your business that encourages people to contribute; this often means marketing the campaign on online platforms or even social media.
If you are successful, however, it’s possible to raise substantial funds, but you need to have raised at least a third of your investment target before launching your business on the platform. You will need to build a following of invested individuals who want to support your company and may even become customers.
P2P lending
Peer to peer (P2P) lending works similarly to crowdfunding in that smaller and larger investors funds are pooled and invested into businesses. However, in this instance, you will repay them through an agreed payment schedule, including interest, rather than offering them equity.
P2P loans are usually less risky than crowdfunding for the contributor, as they have options to get their money back even if you default on payments, such as through debt recovery and businesses are already trading. There’s also the option to reduce the risk further by using assets as collateral. For this reason, P2P loans can be more accessible for a broader range of businesses and can be quicker to secure than a traditional bank loan. However, there will likely be costs that you need to account for, such as origination fees.
There are online platforms dedicated to P2P lending, making it a relatively simple application process.
Grants
Another option to fund a new business is to uncover any grants offered by the UK government or industry bodies that may apply to you. There are numerous grants available, though they often will be created to support businesses with a specific purpose: for example, utilising research and development or innovation, boosting certain sectors, meeting demand in the UK market or improving social mobility.
Start by looking into government grants or researching with local and industry bodies related to your company. If any seem applicable, investigate it further to understand whether your new business could be granted funding. Innovate UK regularly run competitions for businesses.
If you’re successful, it’s an excellent way to secure sizeable capital for your business that does not need to be paid back, however it generally does require a level of match funding. In this sense, you can move towards your funding goals without placing excessive strain on cash flow.
SEIS/EIS
When seeking investment for a new business, the SEIS and EIS schemes can help. While neither directly offers funding, they offer tax relief to investors who support enterprises. By incentivising investors in this way, more should be willing to work with UK companies who have registered under either scheme.
The SEIS programme is aimed at small, very early-stage businesses seeking seed investment. The EIS works with slightly more developed but still relatively early-stage ventures. There are various reliefs an investor can claim under each, but it could include Income Tax relief of up to 50%, exemption from Capital Gains Tax and loss relief if the company should fail.
If you fulfil the criteria for either scheme and are looking to pursue investment, it’s worthwhile considering SEIS and EIS to make your company more attractive to investors and improve your chances of securing funding.
Commercial mortgages
Most businesses will require premises to launch, including stores, offices, restaurants, warehouses, plants and so on. Purchasing property can be costly, and renting may not be an ideal option for many. In this case, a business mortgage is your best bet to get the space you need to operate.
With a mortgage, you will put down a deposit, typically between 25 and 35%, for your chosen property, with a lender providing the rest of the value and you agreeing to a monthly repayment schedule. Interest will also be factored in, though it’s possible to find a good deal by shopping around various providers.
It is worth noting that a mortgage will not help you with funding beyond the cost of your property, so you will still need funds to cover other costs associated with running a business. However, it can be a handy way to overcome the first hurdle of acquiring premises that you can utilise to start your business operations.
Incubators and accelerators
An incubator or accelerator is a programme dedicated to start-ups to help these businesses grow and effectively establish themselves in the market. Most organisations will seek equity in your business in exchange for their funding and support. If they do not fund you directly themselves, they will usually work with you to access seed or early stage investment.
The benefit, alongside the potential funding received, is that these programmes will offer hands-on advice that helps you to run and scale your business. You may also receive increased networking opportunities, exposure to investors, workshops to teach you how to improve your business and reduced rates for professional services or resources.
Accelerator and incubator programmes are growing in the UK, meaning there are now numerous sources compatible for different enterprises. You will need to show some promise to be accepted, as the organiser will want a return on their investment.
By committing to one, you will gain valuable lessons that shape the long-term future of your company while moving towards your financial goals.
Conclusion
Funding a new business is the biggest challenge that every entrepreneur must overcome. By doing so, you can grow and scale your company with the potential for growth through solid foundations.
Fortunately, there are more options for start-ups and scale ups in the UK than ever before. Regardless of your financial goals, the nature of your business or your presumed risk level, it is possible to find a solution that provides the funding you need. The key is to identify the right source for your requirements and remain patient until you find the right solution for your business.