Entrepreneurs and business owners typically use their own savings or family savings when it comes to funding their own startups. According to our recent research, 44% of new businesses are funded by the founders own savings, 20% through inheritance, and a further 19% by gifts and loans from parents.
But bootstrapping, the process of building a business from scratch without attracting investment or with minimal external capital, can only propel your business so far.
Louise Hill, the founder of GoHenry, was interviewed by the Telegraph. One of the lessons she has learnt is the need to address funding.
“We had bootstrapped to such a point that we just didn’t have enough cash or time to be able to step away and raise funds we’d need in order to expand. I was just so cross that I’d allowed myself to fall into that trap.”
In this article we look at how you can raise capital to support and grow your business.
What are your business funding options?
- Business loans – is where you borrow money from a business, usually a bank, which must be repaid with interest in the future.
- Grants – this is a sum of money to kick start your business which doesn’t need to be repaid in the future. Grants are typically from the government and are highly competitive with tough qualifying criteria.
- Investors – an investor will exchange cash for a share of the business’s equity, profits and dividends payments.
Do I need a business plan to get funding?
In most cases, yes. Especially if you’re looking to get a business loan approved by a bank as you’ll need to prove to them that you can afford to repay the value of the loan and the interest until that date.
To attract investors, you’ll need to put together a detailed business plan which outlines how your business venture will make money, how the investment capital will be employed to meet these goals, and when the business will become profitable.
From an investor’s point of view, they’ll be keen to understand when they will start to see a return on their investment, and to what degree.
Where can you get funding for a business?
1. Angel investors
An angel investor is someone who invests their own money in a small business in exchange for a stake in the company. This is typically between 10% and 25% of the business. They tend to be entrepreneurs or business leaders with lots of experience managing and driving companies to success (think dragon’s den).
Angels offer ongoing support, and the businesses that receive the investment will generally benefit from the investor’s time, skills, contacts, and knowledge. They’re often active investors and take a hands-on approach to managing the business. This can mean giving up some of the reins in order to propel your business forward.
2. Crowd funding
Crowd funding is another option for small businesses to raise funds by advertising their business ideas via the internet.
Online platforms like Kickstarter, Indiegogo, and GoFundMe open the gateway for new businesses and start ups to attract funding from ordinary people who can contribute as little, or as much as they wish.
Any donations can be effectively charitable, with investors looking for little if any future return. Alternatively, they can be given in return for equity in a business, or for a future share of business profits.
Alternatively, if you have an idea you want to develop, offering early access to the product or service at a discounted price can raise enough seed capital to go into production. You won’t make a lot of profit but if you get enough demand to start manufacturing it gives you a base from which to expand.
Crowd funding isn’t as simple as it sounds, though. Lots of start-ups are battling for the same funding. In order for your funding project to be successful, you’ll need to put together a marketing strategy, including PR campaigns to build awareness about your business venture and to stand out to potential backers.
3. Venture Capital Schemes
If your business has high growth potential and scalability, you can consider seeking venture capital funding. Venture capitalists typically invest in startups in exchange for equity in the company.
There are four types of schemes designed to help small or medium sized companies grow by attracting investment:
- Seed Enterprise Investment Scheme (SEIS)
- Enterprise Investment Scheme (EIS)
- Venture Capital Trust (VCT) scheme
- Social Investment Tax Relief (SITR) Scheme
There’s no minimum, but there’s a maximum amount you can raise depending on which scheme you opt for. You can ask HMRC if they agree your proposal to raise money is likely to qualify before you apply, but you must check the conditions of the scheme first.
From an investor’s point of view, these schemes offer tax relief benefits to individuals who buy and hold new shares, bonds or assets for a specific period of time. The company, investor and proposed investment must meet the conditions of whichever scheme you opt for.
Read more: What is a Venture Capital Trust?
4. Government grants
Government grants and programmes might be available for small businesses in your industry or region. These grants often come with specific eligibility criteria and application processes. They’re also highly competitive as it’s essentially free money to fund your business.
You can find out more about the government grants available on the HMRC website.
5. Business loans and credit cards
There are two main types of business loan to consider:
- Secured – this type of loan requires you to put up assets (collateral) against the money. This can include property, machinery, or vehicles. A mortgage is an example of a secured loan. If you’re a new business, you might not have acquired any assets to secure the loan against.
- Unsecured – this type of loan is the opposite to a secured loan. They do not require any collateral – which is better suited for new businesses looking for funding. Instead, the lender relies on your ability to repay the loan i.e. your credit rating. Examples of an unsecured loan include things like credit cards and overdrafts.
Unsecured loans typically have a higher rate of interest compared to secured loans, as the risk is greater from a lender’s perspective. For this reason, they should only be used for short to mid-term borrowing needs and the amounts borrowed being relatively low.
Secured loans generally have a lower rate of interest (depending on certain factors like your credit rating), so you can borrow a larger amount over a longer term without the interest payments becoming too overbearing.
Working with Charles Stanley
At Charles Stanley, we offer professional advice and work alongside multiple partners to help effectively manage your finances. We offer planning across the generations with both personal and business finances fully considered.
Our experts are at hand to provide a financial planning perspective to business owners and their advisers as they decide the best way to fund their business. We work with legal, tax, and accountancy teams to help owners structure and manage owner wealth outside their business and ensures that a wealth plan aligns with a holistic plan for life including philanthropy, new business causes, and personal life and retirement.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
