Starting your own company can be a daunting but rewarding process. While a great business plan is crucial for founders, financing is one of the most important elements a company needs to succeed.
Finding funding can be the hardest part of getting your business off the ground but also the most rewarding. With over 600,000 new startups entering the market in 2019, a figure set to rise in the coming years, competition for new business funding has never been greater.
Having said that, it’s not all doom and gloom. There are a lot of options to get a startup funded in the UK, and the numbers are constantly growing. From personal investment and bank loans to angel investors and crowdfunding, the landscape of startup funding in the UK is diverse. Read on for our first-time founder’s guide to where to look for funding, and which type might be right for you.
What’s the First Step in Funding a New Business?
Before starting to raise funds, it’s crucial to work out how much you’re going to need. Don’t just think about your immediate start-up costs — consider all the operating costs you’re likely to have in the first year.
It’s a delicate balance. Not having enough money will stop you from operating effectively. But if you spend too much, you’ll pile pressure on yourself to generate more money than you would need otherwise. Burdening yourself with too much debt will increase the likelihood of your business failing.
Obviously, you’ll be looking to generate income as quickly as possible, and it’s important to estimate what this will be. Bear in mind that it can take time for a new business to begin making regular sales, let alone make a good profit. Consider this when estimating what funding you need to keep the business going in your hugely important first year.
Personal Investment
Investing your own money to kickstart your business can be the natural first step to financing your dream as it can be quicker and easier than applying for finance.
Also, if you’re starting a new business, you need to be confident that it is going to succeed. Investing your own money is a great way to test your commitment to your concept by putting your money where your mouth is.
But is it right for you?
Before investing your own money into your business, you should consider the below:
- Keep your pots of money separate — make sure you have a separate bank account to keep track of personal vs. business funds.
- Keep things simple — transfer a lump sum over to your business account rather than moving dribs and drabs.
- Be careful — evaluate the risks of investing your own money before committing.
- Protect your assets — make sure you won’t lose vital assets such as your house or retirement savings if something goes wrong.
- Know your limits — know your personal survival budget to keep your head above water as you start your business.
Ask Friends and Family
If you don’t have enough money to fund your business, you might be thinking about asking friends or family for financial help. Consider inviting family and friends to invest in the company with the understanding that their money may not be returned. In most cases, these friends and family are investing in you, not your business. Both parties should think of this investment as a grant with no strings attached. If the enterprise succeeds, a reward to these risk-takers would be a nice gesture.
Business Loans
Many high street banks offer business loans to help companies invest and grow. However, banks can be risk-averse. This means they might not be as willing to back a new business as they would an established one because with older businesses they can look at past trading to assess future viability. They also sometimes favour limited companies over sole traders, as limited companies are sometimes perceived as more respectable and reliable due to being more open to public scrutiny.
When applying for a business loan, you’ll need to be able to show any lender that your business is ready for investment and you can afford the repayments. To do this you’ll need:
- A detailed business plan
- Clear sales projections
- A robust cash-flow forecast
- Accounts and tax returns (if applicable).
Crowdfunding
If you haven’t heard about crowdfunding, you must not be serious about funding your business — or you’ve been living under a rock over the past six months. Crowdfunding allows for a wider pool of small investors with fewer restrictions and is ideal in the early stages of a business, especially if you don’t qualify for a bank loan or don’t have the friends or family willing — or able — to provide the “no-strings-attached grant”.
Many sites have started crowdfunding already such as Kickstarter, Indiegogo and Crowdfunder. So if you don’t want to wait until next year to start asking for funding for your business or project, you can get started now.
Angel Investors
As your business reaches the next level of growth and you see steady revenue on the horizon, begin to approach sophisticated “angel” investors if you need more funding. This affluent individual — or a group of individuals who pool their research and resources — provides capital for a business startup usually in exchange for convertible debt or ownership equity.
These angel groups can be found in most communities — and on the internet — with a description of their purpose and objectives. After doing their due diligence, these groups will determine if your business meets their requirements and if so, will schedule a meeting to gather more data. Investments can range from £50,000 to £500,000 or more. At this stage of the business, angels become real and serious investors and owners with high expectations looking for solid results.
Funding Your Startup
Regardless of which path you take, chances are that you may use all of these funding options at some point as your business grows. At the end of the day, you have a business to run and none of this matters unless it has your full attention. So find a viable funding solution that also allows you to maintain operations and focus on profitability.
Mint Formations is an expert in company formation. Register your company with us today to take the first step in getting your startup up and running.
