The Start-up Guide to Business Funding

One of the most common worries of startup owners is how they’ll raise the funds needed to get their business up and running. Thankfully, there are plenty of funding options available to startups in the UK, from government grants to private investment. We cover the main contenders below, including eligibility and things to look out for.

1. Bank funding

A traditional bank loan is a good option for startup owners who want to retain equity in their company. However, as we explain below, getting funding for a startup from a bank can be difficult unless the amount you want to borrow is relatively small and you have a spotless credit score.

Eligibility

Banks have rigorous application procedures, so it’s important to have a clear plan detailing exactly how you will be spending the money. Along with preparing your business plan and forecast, you’ll also need to have a healthy credit score and realistic projections about how you will turn a profit.

If you have a poor credit score, or have filed for bankruptcy in the past, then you may struggle to be approved for a traditional bank loan. You’ll also need to own something valuable to offer as collateral against the loan, such as a property or business assets.

Things to look out for

You’ll often need to be an existing member of a bank before you can take out a business loan with them, so plan ahead by setting up accounts with the bank of your choice before you approach them for a startup loan.

Bear in mind that banks are generally reluctant to loan money to startups, so there is usually a lot of paperwork and several meetings to get through before you get a decision in principle. Bank loans are also rarely flexible, so if you’re in a position to pay off your business loan early you may fall victim to hefty early-repayment charges.

Finally, if you go for a bank loan with a variable rate, this means that the interest you pay will fluctuate, so consider opting for a fixed rate if the Bank of England rate is low when applying.

2. Government funding

One of the key priorities of the UK Government’s Business, Energy & Industrial Strategy (BEIS) is to make starting a business in the UK easier. Consequently, there is a healthy roster of schemes and grants available to those looking for funding to start a business. In addition to regional funds, there are also specialist public funds and local government funds to look out for, so contacting your local city council may be a good place to start.

Eligibility

The eligibility of each grant and scheme will vary, but many have certain conditions in common. For example, Startup Loans offers finance to new businesses that can prove they have been rejected by traditional banks and that fall into their approved list of business types and loan purposes.

Similarly, the current Enterprise Finance Guarantee facilitates finance for SMEs that are unable to secure a traditional finance product due to not having anything to offer as collateral.

Bear in mind that many government grants are reserved for businesses that aim to create products which will directly benefit the UK. These include startups focusing on the technological, scientific and medical industries. For this reason, it’s important to check the individual criteria of each grant or scheme before applying.

Things to look out for

You can find a full list of government grants and schemes by using the government support finder. It’s important to note the deadline for grants and schemes, as they are constantly being updated as new funding is secured and new schemes are introduced, so be sure to check if schemes are still running before you apply.

As touched on above, the criteria for each grant and scheme varies significantly, so ensure you have thoroughly checked the fine print and eligibility criteria before applying.

3. Angel investors

Angel investors are individuals who invest privately into the growth of a small business at an early stage in exchange for equity. They're usually well-connected and high-net-worth individuals who have taken a liking to your product. However, angels could also be a group of investors who club together to fund a new venture or even a friend or member of your family who has decided they want to invest in your business. The amount invested could vary significantly, depending on how much the investor is willing to part with and the business proposition.

Eligibility

Angel investors specialise in getting early-stage businesses off the ground and tend to lend anything up to £1 million. They will only invest in businesses they think they’ll make a good return on, but their motivations behind their investment can differ quite dramatically. Therefore, some angel investors may want to help less experienced businesses within their sector, whilst others may simply take a liking to your brand or mission and want to help you succeed.

Things to look out for

Due to the fact they tend to invest in the early stages of a business, the percentage of equity angels require for their investment is often high. Also, whilst some angel investors like to be involved in the business and mentor, others will want to take a hands-off approach. As such, it’s important to discuss terms of the arrangement prior to accepting any funds so that you have clear expectations of how much involvement the investor will have.

4. Venture capitalists

Venture capital funding comes from a variety of sources – from large corporations as well as individuals, pension funds and foundations. Venture capital firms consist of professional investors who focus on finding and investing in businesses with high growth potential. Unlike angel investors, who are usually individuals, gaining venture capital usually involves winning over a whole firm, including board members and the people whose job it will be to help your business develop.

The firm takes shares and will have a say in how the business is run. In exchange they expect a high return on investment. Once they believe they have added the maximum amount of value, they will look to sell the business to another interested party.

Eligibility

As a general rule of thumb, venture capital firms are unlikely to invest less than £1 million. They look for long-term growth potential when assessing businesses to invest in, so they’ll often take their time completing their due diligence to ensure a company is worth their investment. Inevitably, this will take longer than angel investors or alternative finance providers.

Things to look out for

Since venture capitalists only deal with larger sums they tend to invest in companies later down the line, and so startups tend to lean towards angel investors instead.

Venture capitalists will also want more of a say in how the business is run – part of their overall offer is to buy into the company and help steer its path. If you already have a solid vision of how you want your startup to progress, venture capitalist funding may not be for you.

5. Crowdfunding

Crowdfunding involves raising funds from a large number of individuals who each contribute a small share. This is often facilitated through online crowdfunding platforms, and there are several subtypes of crowdfunding available to startups:

Equity crowdfunding

This is a way for entrepreneurs to raise funds by selling shares (equity) in exchange for investment. This means that they can seek funding from everyday investors alongside venture capitalists and institutional investors too. Having a mix of investment means that startup owners will also have access to a wide audience and market their brand alongside their crowdfunding campaign. As such, equity crowdfunding is considered a quick way to access capital, with many campaigns hitting target within a month. For this reason, it’s vital to have excellent PR and advertising to support the campaign.

Rewards-based crowdfunding

This form of crowdfunding involves individuals pledging money in return for rewards, such as access to your products or services. Crucially, it means that you don’t have to part with any equity in your business, instead you just have to ensure you are able to honour the pledges. As a result, when you set up a rewards-based crowdfunding campaign, those investing are your future customers.

Debt crowdfunding

Debt, or peer-to-peer crowdfunding, involves borrowing money from a range of individuals, and paying interest on the money borrowed, much like with a traditional bank loan. However, it can be difficult for startups to succeed this way, as most investors will want to see a healthy credit score and good history of cash flow.

It’s worth noting that if you don’t hit 100% of your crowdfunding target, any investment already pledged is returned to the investor. This is true of most crowdfunding platforms, no matter which type of crowdfunding you've chosen to go for. Therefore, crowdfunding is most beneficial to businesses with a committed user base that will support their raise. It's also crucial to invest in a solid marketing or promotional strategy to support the campaign and get the word out.

Access to mentoring & advice

The are several hubs of support and information for startups dotted throughout the UK. For example, there are currently over 170 Accelerators across the UK helping new business owners by providing advice, mentoring and technical support in exchange for a small equity stake in the business. In addition, accelerators have also been known to offer direct funding and office workplaces to the startups they work with.

Similarly, Incubators focus on fast-tracking the growth and success of startups. Like Accelerators, UK Incubators will provide startups with mentoring, advice and networking opportunities otherwise unavailable to them. Many of the UK’s Incubators focus on the scientific and technological industries, but there are some that provide their support to any new business showing exceptional potential.

There are also 38 Growth Hubs across England, providing support to startups through public and private partnerships. Growth Hubs also work in partnership with the BEIS and deliver business support based on local needs, making it easier for businesses to access the help and advice they need for growth.

Finally, if you’re successful in securing finance through a government-backed provider, you may also be able to access extra mentoring for free. For example, with Startup Loans, you’ll not only be paired with a business advisor during the application process, but you’ll also be provided with a business mentor for 12 months who will guide you through the early stages of running a business.

If you want to find a mentor in the UK, but are unable to access the schemes mentioned above, there are several online tools available to help you secure mentoring.

Once you’re up and running

If you need additional funding, there are many alternative finance providers who can offer you funding once you’ve been trading for six months. For example, at Fleximize, we can lend up to a maximum of two times your monthly turnover through our unsecured loans of up to £250,000 and secured loans of up to £500,000.

It’s therefore well worth considering your long-term funding options when applying for startup funding, as you may be eligible to more money once you’re up and running. For example, if you’re about to launch a business but have been turned down for the startup loan of your dreams, see what is available to you in the short term. Carefully adjust your business plan and explore how you can make your business profitable with the funds available until you can scale up by applying for alternative finance in the form of a small business loan.