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Sources of Finance for Starting a Business

When it comes to starting a business, the biggest challenge new entrepreneurs face is finding sources of finance. We've got a list for you!

When it comes to starting a business, the biggest challenge many new entrepreneurs face is finding sources of finance.

It’s very important that you have enough money to not only set up your business but also to cover all other costs while your sales revenues are only building up. If you don’t, your business will be at risk of failing from the very beginning.

There are quite a few options you can try to source some funding from. This is the list of those.

Personal savings and money from family and friends

Personal savings and money from family and friends are the most popular form of finance for starting a business. 

If you’re struggling with getting a loan from the bank, your friends and family might be happy to help you by giving you some money or offering an interest-free loan. If they offer you a loan but ask you to pay interest, there will be tax implications for both you and a person that you borrowed money from. 

While asking for money from someone you know can be a quick and easy way to increase your cash flow, it can also have some negative consequences. If your business fails or you can’t repay the money on time, it might affect your relationship with those people. 

Business loans

Business loans are available from most high-street banks. If you decide to get a loan, make sure you spend some time looking for the best deal. Consider things such as the amount you need, the rate of interest and the repayment period. Also, if you’re a startup, it’s likely that you’ll have to secure the loan against a personal asset such as your house. 

Overdrafts

Most banks offer overdrafts, so you can withdraw more money than you have in your account. This could be a great option if you only need some extra money at certain points of the month or a year. However, the interest rate is usually higher than the rate for a loan. 

Credit cards

When it comes to using credit cards to fund your business, they can be both useful and dangerous. While you can fund your short-term spending, you’re risking getting into debt if you don’t repay the outstanding balance on time. Most of the time, interest rates of credit cards are higher than overdrafts or loans. 

Private equity investors

Private equity firms are third party investing in a business in return for a share of the ownership. The investment can be provided by commercial organisations or private investors but is only available to limited companies. Sole traders and partnerships aren’t eligible for private equity funding. 

Wondering how private investors get a return on their investment? They achieve a return through the payment of dividends by the company and through selling their shares. Also, investors face the same risks as the other shareholders. This means that in case of business failure, they will lose their money too. 

Examples of private equity investors:

Venture capital

Venture capital firms are commercial organisations that invest money in a business in exchange for a proportion of the company’s shares. These investors usually invest in innovative but risky start-ups hoping they will become successful. 

A lot of venture capital investors make big investments, for example over £1 million. To find out more about the funding available and the contact details of investors, check The British Private Equity & Venture Capital Association website.

Business angels

Business angels are private investors that invest in new or growing small businesses. 

They usually provide funding at the initial but crucial moments – when the startups are most likely to fail. Most of the time, they invest between £5,000 and £50,000.

If you’re looking for angel investors, the UK Business Angles Association matches business angels with small companies and Angles Den runs workshops for startup companies looking for funding.

Crowdfunding

Crowdfunding is when a business or a project is funded with small donations from many different people instead of one or two major investors. This can be a great option for those businesses that struggle to get a big formal investment.

Crowdfunding can be donation-based, which means that investors don’t expect anything in return or rewards/equity/debt-based, so investors get something in exchange. This can be some type of discount, a proportion of a business or money back with an interest.

However, getting funding through crowdfunding isn’t as easy as it might sound. Creating a successful crowdfunding campaign requires time and effort. Even if you have an amazing idea, success isn’t guaranteed. Potential backers usually don’t actively seek projects or businesses to invest in. That’s why you need to do everything you can to reach those investors and prove that your idea is better than anyone else’s. To learn more about creating a successful crowdfunding campaign, read here.

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Government and local authorities

Both government and local authorities provide grants, loans and other support for startup businesses. For example, some councils offer low-cost office space for new companies.

Grants 

Grants are only available for those businesses that need financial support to undertake a specific project that wouldn’t proceed without that money. For example, developing a new product, buying new equipment or even starting a business. The money you receive can’t be used for working capital or to support the organic growth of a business. 

Unlike a loan, a grant usually does not have to be repaid unless you fail to comply with some conditions of the scheme.

However, most of the time a business will have to meet some of the costs (usually at least 50%) and sometimes a business have to spend the money first then reclaim the grant contribution.

Various grant schemes are available in different regions of the UK:

Grant application forms can be lengthy and may take a lot of time and effort to complete. Our business advisors are happy to help you with your application and make sure you receive it. Contact us to find out more about the support available.

Startup Loans

A Startup Loan is a Government-funded loan that supports those who are starting their own businesses or developing a business that has been trading for no more than 24 months. It’s a low interest, unsecured loan of up to £25,000, depending on your business needs. 

The reason the UK Government funds start-up loans is that new businesses are considered to be risky and most other lenders cannot help them.

To be eligible for a Startup Loan, you need to live in England, Scotland or Northern Ireland, be 18 years of age or older, have the right to live and work in the UK and demonstrate that you can afford to repay the loan.

Responsible finance providers

Responsible finance providers are non-for-profit money lenders providing financial support to new and growing companies that are unable to get funding through traditional providers such as banks. Their main goals are to increase access to finance and deliver economic, social and environmental benefits. 

For more information and contact details of the nearest responsible finance providers, visit the Responsible Finance website.

Credit unions

Credit unions are member-owned financial institutions that provide services similar to banks including deposit accounts and loans. When it comes to loans, they are provided from one pool that is created by the members of the union. As credit unions are not-for-profit, the interest rates are low and the profits made are distributed to the members in the form of dividends. 

Independent business support organisations

There are a number of independent business support organisations, such as enterprise agencies, that provide financial support, including:

  • Soft loans. No security loans to the businesses that can’t raise all of the finance they need from other sources
  • Grants that have narrow eligibility criteria. For example, grants that are only available for businesses based in a specific area or sector, or grants for specific projects. 

To find out more about enterprise agencies, visit a website that suits your location.

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