Seeking Funding for Your Business
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Starting your own business can be lonely and we can help by answering your questions or simply if you need to talk to someone.
Most companies need start up funds to get going in the first few months or years of trading.
At some point in almost every business owner’s mind is how best to secure funding to help grow their business.
It can be a daunting prospect to understand the different types of funding options available and figure out which will suit you best.
Below you’ll find a simple guide to funding options that will help you get started on your journey, together with links to the various resources for you to find more information. We strongly encourage you to do your research and never borrow more than you need. Also, be very careful with terms and conditions and take the time to read and fully understand what they may mean to you and your business.
A solid business plan is the most useful tool for influencing lenders, so if you don’t yet have a business plan in place, contact us for support in helping you to develop your plan.
Self-funding is the option for a business that gets started with very little money (capital) and relies on the business owner’s personal money to fund everything. Typically, this will be from personal savings or perhaps money from redundancy or a previous business etc. It also describes a business that continues to trade from the revenues generated by the business, often requiring a rapid turnover of stock to create cash flow, and many business owners do this successfully until they begin looking to properly grow the business.
In many respects, it’s the best way to fund a new business venture because it enables you to retain full control, and you are not tied to anyone else for the success of your business, and if it doesn’t work out as you’d hoped, you’re not left with a huge debt to repay.
However, using your own money also means increasing the financial strain on you, thereby limiting your resources where emergency funding might be required at some point, and also means if things don’t pan out, you could be left with nothing.
You may wish to consider asking family and friends for financial support to help you get started in your business, and in reality, they’re often the best people to go to because, if they have the means to help you, they’re less likely to put you under pressure to perform – at least in the early days.
On the face of it, this sounds like an ideal situation, but borrowing from friends and family can cause serious relationship breakdowns. Go into this situation carefully and discuss every aspect with everyone involved first. You should always document the funds you receive and be careful to manage the expectations of how and when the money will be returned.
In the majority of situations, the money given to you by friends and family is a loan, so be clear about whether any interest is to be paid back for loaning you the money.
The money given to you could also be considered to be an investment, in return for which they are likely to expect to receive equity (a slice of your business).
A signed declaration will help both parties understand expectations and may help resolve any potential disputes in the future.
For more help and guidance, read the excellent article on Money Supermarket about borrowing money from family and friends.
Securing a loan from a financial institution is by far the most common form of fundraising for a business, and everyone does it, from startups to corporate giants. A loan to fund your business is known as ‘debt funding’ because by receiving the money, you now have a debt to repay.
There is much to be mindful of when taking out a business loan, not least of which, as obvious as it may sound, is the responsibility you have for repaying it.
High street banks will want to know their money is safe and will be returned according to a pre-agreed arrangement (your loan repayments), so in order to draw down the loan, you will need to show evidence that your business is viable, that there is a need for your product and service, that you have an existing or obvious customer base, and have a concrete business plan in place.
If you already have a business bank account and a relationship with your existing bank, talk to them first, but remember you are under no obligation to obtain a loan from your current bank as there are many other opportunities.
Be sure to check for the best interest rates, known as the Annual Percentage Rate (APR). This is the amount on top of your loan that you pay each year to borrow the money and will vary depending on your risk profile. The APR is a broader measure of the cost to you of borrowing money since it reflects not only the interest rate but also the fees that you have to pay to get the loan.
The British Business Bank is a government-owned bank which has specific start-up loans for early-stage businesses and is dedicated to making finance markets work better for smaller businesses with a solid business plan. They provide loans of between £500 – £25,000 with an APR of only 6%, and are repaid over one to five years. A key advantage to using the British Business Bank over a high street bank is there are no fees for arranging the loan or for paying it back early.
Most options for funding your business can come with their specific risks, whether that’s losing your own money or trapping yourself in debt that you aren’t equipped for before you’ve even got started.
Perhaps the most risk-free is applying for grant schemes where the money awarded is generally awarded with no expectation of repayment, either from the government, an organisation or perhaps a wealthy philanthropist.
Grants can’t be thought of as completely free money, however. The application process can often be long and complicated, with several boxes to tick and hoops to jump through, so you do need to decide whether anything you go for is relevant and worth the time put in. They can also have specific eligibility aimed at specific demographics, with high levels of competition, meaning you really have to stand out to get the award at the end of it.
The last thing you need to be wary of is any expectations once you have been awarded the money. This could be something specific such as you having to use the money for or potentially achieving a target agreed on beforehand. If there are those strings attached, you must stick to them.
If you are developing a social enterprise, business for good or charity, you may be able to take advantage of these local funding pots specifically for our region.
Please be sure to check your eligibility before applying.
Crowdfunding can be an effective way to raise funds for someone uneasy about taking one of the more traditional routes. By using a crowdfunding platform, you put your business idea out there for people to judge, and if they see value in the idea, they can help fund it.
There are different reasons a funder might be attracted to your business idea. It may be your product rouses nostalgic feelings, and they think investing connects with something they remember fondly. It may simply be a novel idea, providing a solution to a problem. Or you may already have loyal customers for an existing product, and they are happy to help you fund your next great idea.
You can also offer incentives. Such as early release or including them in the product somehow as a personal touch.
Crowdfunding can be a competitive space, so if it is something you think would work for you, you must be ready to put the effort in to create a campaign that stands out and grabs people’s attention. They have a lot of choices so you’ll need to give them a clear reason why they should part with their hard-earned money on your business idea.
