Posted: Sun 23rd May 2021
So, you have a killer business idea but lack the cold, hard cash to get it off the ground? This is a situation that many entrepreneurs find themselves in.
Starting a business isn't just a pursuit for those who already have plenty of capital in their back pocket. Companies House reported that there had been 665,495 company incorporations in 2020, the second-highest figure since records began.
Thanks to modern tech giving us the ability to work remotely and in our spare time, people from all walks of life and across an array of industries are making the leap from employee to entrepreneur.
And while you may need grit, determination and a capacity for hard graft to start your own business, you needn't already have stacks of cash in a vault.
Whether you've already launched or are yet to quit that day job and fully commit, there is a range of funding opportunities out there to consider – from government grants to crowdfunding campaigns and angel investors.
It's likely that the people who believe in you and your business idea the most are right under your nose. So, it makes sense to ask them if they'd like in on it or could lend you the cash.
As there is already trust between you, you won't have to prove yourself as you might with an outside lender, either. But still take the time to discuss your business plan, so there's transparency and they know exactly where their money is going.
Consider having a written agreement too, that covers the amount borrowed and a payback schedule, so you both know where you stand.
Introduced by the government in 2012, Start Up Loans can make between £500 and £25,000 available to entrepreneurs across the UK. Alongside a loan, you also receive a mentor who offers help throughout your business journey.
To be eligible, you'll need to be over 18, live in the UK and have a UK-based business – or a plan for one – that's been fully trading for less than two years.
Interest on these loans is fixed at 6% a year and you can choose how long you take to repay them, from one to five years. Unlike most loans from the bank, there's no fee for early repayment.
The government also offers grants for promising businesses that are innovating in particular sectors. The different funding programmes all have specific criteria – including things like industry and location – so it'll take some research to find the ones that you're eligible for.
The great thing about grants is that there's nothing to pay back – who doesn't love a bit of free money? Although in reality, 'free' might not be the best word to describe this kind of funding. It takes a lot of time and effort to apply for grants, with no certainty that you'll be successful in securing any cash.
Still, it's well worth looking into – especially if you're creating something brand-new and ground-breaking. If that sounds like your business, the UK Research and Innovation website is well worth checking out for opportunities.
Over the last decade or so, crowdfunding has become a really popular way for businesses to raise funds – whether they're just starting out or looking to grow.
Crowdfunding involves generating pledges from the public, and in turn opens up investment opportunities and the chance to help fund desired businesses to the masses.
By raising funds this way, you can also drum up attention for your business and build an audience of potential customers and advocates.
There are three main types of crowdfunding:
This is where people pledge money to your business or product in exchange for a reward.
Possibly the most well-known site to offer this form of funding is Crowdfunder. Rewards come in all shapes and sizes – from merch to vouchers and products – and can depend on the size of the donation received.
This is where people invest in your business in exchange for equity – in other words, a percentage of the business. If the business does well, they'll get a return on their investment via a share in the profits.
You'll need to value your business and work out how much funding you need, so you can offer the right percentage of shares for the right price. Popular equity crowdfunding platforms include Seedrs and Crowdcube.
This is where you raise a loan from the pooled funds of multiple sources. You'll need to repay the total sum plus interest. LendingCrowd and Funding Circle are two of the best-known platforms for this.
As crowdfunding has increased in popularity, the number of platforms has grown too. As well as those mentioned above, here are some more of the best-known:
Depending on your circumstances and how much you need to borrow, traditional business loans from the bank might be the way to go.
Banks have specialist small business advisers you can talk to who are experienced in lending to start-ups. Polish your business plan and take it with you – don't leave any gaps and be prepared to talk it through thoroughly.
You want to inspire confidence in your adviser and present a clear strategy as to how you'll repay the loan.
If the bank is unable to lend to you or won't lend you enough – loan amounts can be modest for start-ups, given the risks involved – don't be disheartened. You still have plenty more options to look into.
Early-stage businesses usually have few assets and lots of prospects, and UK lenders are reluctant to lend against prospects. This leads to offers of so-called 'unsecured' lending, for which lenders demand personal guarantees.
Try to avoid these situations. If you do give a personal guarantee, use devices such as shared ownership to make sure your homes and other personal assets stay out of the lender's reach.
Angel investors and venture capitalists can offer large amounts of funding to help start-ups get off the ground or grow.
Taking this route means handing over shares or part-ownership in exchange for money. Then, once the business is bringing in profits, the investors share in this, making their money back – and hopefully then some.
If you've ever watched Dragons' Den you'll get the idea – although you won't have to pitch to a panel of millionaires in a nondescript industrial building with cameras pointed at you. There are lots of far more low-key investors out there looking for great business ideas to invest in.
This is helped, in part, by the government having made it rather financially attractive for angels to invest in small businesses through the Seed Enterprise Investment Scheme (SEIS). This offers individual income tax relief of 50% and exemption from capital gains tax on any proceeds of sale of a SEIS investment.
Here are some websites that may help you find investment:
Whichever route you decide to go down when it comes to raising funds for your start-up, make sure you've done your research. Try to speak to other business owners about how they funded themselves in the early days and build up a balanced picture of the pros and cons of each method.
Initial funding may feel like a huge hurdle, but keep your eyes on the prize and it'll be you giving advice to new entrepreneurs soon enough.
Personalised finance options for start-ups, small businesses, sole traders, freelancers and other business professionals. Take the Access to Finance tool and get recommendations tailored to your financial needs.