Your financing options
When starting a business, you may want to use your own money or funds from family and relatives. Later on, you could introduce other ways to manage cash flow, such as an overdraft facility. But remember to factor any borrowing costs into your business plan.
Bootstrapping
Bootstrapping is when an entrepreneur starts a business with little capital, relying on personal money other than outside investments. If you have the money, you can of course continue funding everything yourself. You won’t have to pay interest and will retain full control over the business. However, once your money is invested in the business, you won’t have access to it yourself as a contingency. So, make sure your business can get funds from other sources if you face cash flow issues.
Self-investment is sometimes done in the form of a loan. The director of a company could lend money to their own business and then take it out again later instead of wages. You may want to discuss this with your accountant first.
Asset finance
The usefulness of asset finance depends on the nature of your business. If you need vehicles or machinery, it could provide a solution. The asset can sometimes be used as collateral, which reduces the lender's risk.
Asset finance also avoids the need to acquire assets with cash. Instead, you can buy it over an agreed period of time to protect your cash flow. Other financing options of this type include contract leasing and hire purchase.
Business loans
When assessing your loan application, we typically require the following information:
- Your application, including your business plan and cash flow forecast.
- Your personal credit record.
- Your experience.
We like to see that you have enough confidence in your venture to commit your own money to it. That way, you have a personal stake in its success.
You may need to provide security for the loan, such as: property, Directors' & Personal Guarantee.
We will want some form of oversight when providing start-up business loans, such as cash flow forecasts.
Grants and loans
There are many government financial support initiatives, including a start-up loan scheme offering up to £25,000. Depending on your business type or sector, you may be eligible.
The British Business Bank also provides start-up loans to UK small businesses.
Business grants are a non-repayable source of finance that can be awarded by the government or private organisations following application. However, grant applications can take time and contain extra fees or commitments. Also, the eligibility criteria may not align with your planned business direction. You may then need to shift your planned offering away from its original focus in order to qualify.
Third-party equity investors
Some business ideas may need a great deal of research and development. Software development, for example, or online services creation. This may require alternative finance or equity investment because this type of funding isn't typically suitable for banks.
Third-party equity funders offer investment in your business in exchange for a share. The upside is there’s no immediate interest payment and plenty of expert advice and support. But you will no longer fully own the business. And if you want to regain full control, the equity you’ve given up could be costly to buy back.
Depending on where you are in the business cycle, you could explore the following funding options:
- Business angels.
- Venture capital firms (VCs).
- Independent investors.
When financing a start-up, Angel networks and individual investors could support you with funding. They like to buy in early, but usually want more equity because of the higher risk. However, they are usually sophisticated investors with a passion for your sector and lots of useful experience.
VCs look for better-established businesses with the potential for higher, long-term growth. They offer significant funds to suitable businesses, along with mentorship and a network of contacts. But, you'll have to give up some control, and they could intervene if they don’t like the direction of the business.
Read our guide to Alternative sources of funding for more information.
Crowdfunding
Crowdfunding reverses traditional investment by asking large numbers of people to contribute smaller amounts. It is used to fund a wide range of start-ups, artistic projects and community ventures.
It can be easier to raise money because there are fewer obstacles for start-ups and the process takes months rather than years. But it's complex and you may wish to seek financial advice before proceeding.
It's also a very public way to raise funds. So, if your business is built on a secret, innovative idea, this is not the funding avenue for you.
Other third party investment sources
These include peer-to-peer lending and peer-to-business lending. The principle is simple, third parties will front the cash through a fund or other investment vehicle in exchange for a return (though not necessarily equity).
