Looking for finance for your startup business? This guide explains how to find it.
Finding business funding is one of the biggest challenges most startup founders face.
Whether it's money to get your new venture off the ground or finance to scaleup and launch in a new market, it can be hard to understand how to fund a startup and know which type of finance is best for you.
In this article, we outline seven startup funding options for UK businesses to consider.
A grant is business funding that you don't have to pay back, so it can be an attractive option for small businesses.
There are a wide variety of schemes with varying eligibility rules. For example, there are grants for entrepreneurs looking to launch a new business and for more established small business owners wanting to expand their product range or export overseas.
Places to find grants include:
- Government websites for England, Wales, Scotland and Northern Ireland
- Growth Hubs in England
- Government bodies such as UK Research and Innovation and Arts Council England
- The business support department at your local council
- Charities such as The Prince's Trust, Unltd and The National Lottery Community Fund
- Services such as j4bgrants and Grant Finder
Grants can be complicated to apply for, with lots of paperwork to complete. There will likely be restrictions on how you can use the money, and you might be required to match fund the grant, which means you have to provide some of the money yourself.
Many small businesses can secure a loan from a traditional high street bank, but they are tricky to access for new startups without a trading history.
For young businesses, the government's startup Loans scheme might be more suitable. It provides unsecured personal loans of between £500 and £25,000 with a fixed annual interest rate of 6% and a one-to-five-year repayment term.
To apply, you must be:
- Aged 18 or over
- A resident of the UK with the right to work in the UK
- Starting a UK-based business or have been trading for up to 24 months
- Unable to secure funding from other sources
Personal credit checks will be carried out, and you need to submit a cash flow forecast and business plan. Successful applicants receive 12 months of free mentoring as well as the loan.
Peer-to-peer business loans
Peer-to-peer (P2P) lending is another type of business loan.
Companies like Funding Circle and Iwoca connect borrowers with investors willing to lend money. They typically provide loans of between £5,000 and £500,000.
The application process is usually straightforward, and you could get the money within a few days.
P2P loans aren't suitable for very new startups as the business needs a trading history. Interest rates can be higher than for standard bank loans, and you might need to pay an arrangement fee.
This popular form of startup funding involves uploading your pitch to a crowdfunding website and persuading members of the public or investors to give you money. As well as raising funding, it can be an effective way to get publicity and measure interest in your product or service.
There are two main types of crowdfunding:
- Reward: You ask for money in return for a non-financial reward such as your product. Popular websites include Crowdfunder and Kickstarter.
- Equity: You ask for money in return for an equity share in your business. Popular websites include Crowdcube and Seedrs.
Reward crowdfunding is most suited to product startups, while equity crowdfunding is particularly useful for non-product businesses or businesses seeking larger amounts of funding to grow.
If you already have customers, social media followers, email subscribers or investor contacts, ask them to contribute before you open the crowdfunding campaign to the wider public. If you then launch with funding already committed, others are more likely to invest.
It can take a lot of time and effort to make a success of crowdfunding. You'll need to create an engaging video pitch and invest in plenty of promotion. You may not get any money if you fail to hit your target.
Accelerators and innovation programmes
Investing in the services of experts is a great way to grow your business, but they can be hard to find and expensive to access. By signing up to an accelerator or innovation programme, you can benefit from their expertise for free or at a low cost. Many programmes also provide grant funding and connections to potential partners and manufacturers.
There are a range of different innovation programmes for UK small businesses, so do your research to find the one that is right for you. Things to consider are the types of businesses the programme supports and if the accelerator takes an equity share in your business.
Business angels and venture capital
Many startups decide to secure finance from business angels or venture capitalists (VCs).
Angels are suitable for the seed stage, when a new product or service is being established, while VCs provide finance for series A, B and C funding rounds as a business grows.
You can attract investors using the Seed Enterprise Investment Scheme (SEIS) and the (EIS) Enterprise Investment Scheme, which provide tax reliefs.
Angel investors are high-net worth individuals who invest in early-stage startups in return for equity in the business. They are often successful entrepreneurs themselves, so they bring expertise and contacts as well as their money.
Business angels typically invest between £5,000 and £500,000 in a single investment for between 15% and 25% equity.
Angels invest on their own or as part of a syndicate. They want to see a good return on their investment, so your business needs to have good growth potential.
Business angels tend to focus on specific areas, sectors or business types.
Unlike business angels, who are individuals, venture capital investing involves a firm of professional investors. They use money from a variety of sources, including private and public pension funds.
VCs are usually not suitable for the seed stage as they look for businesses with very high growth potential. They rarely invest less than £1m and take a seat on the board of the businesses they back.
Winning over a VC can significantly fast track your business growth, but it's a difficult process. You will probably need to pitch to several firms before you get a yes, and the final deal can take several months to be signed off due to the due diligence required. You also need to be prepared to work with investors who have a say in how you run your business.
Ways to find business angels and venture capital investors include:
- Contact an angel investor network
- Search the member directories of the UK Business Angels Association or British Private Equity and Venture Capital Association
- Attend business events
- Search Twitter and LinkedIn
- Ask other entrepreneurs for recommendations and referrals
Through our innovation programmes and workspaces, Plus X Innovation provides knowledge, guidance, connections and structure to unlock the potential of a great idea.
Content + Social Media Manager at Plus X Innovation.