How to fund a new business

Building a business from scratch requires time, dedication, and effective planning, especially when it comes to the financial side of things. So, if you’re curious about the best ways to fund a new business, and are wondering which route to take, we’re here to help.

Our guide explores the best funding options for new businesses in the UK, diving into the benefits and drawbacks of each one.

How to fund a new business in the UK

From government grants to personal funding, there are a variety of options when it comes to launching a new business in the UK. Below, we’ll dive into the most common routes, highlighting the pros and cons of each.

1. Personal funds

Wondering how to fund a new small business? Well, if available, many entrepreneurs choose to invest their own money, perhaps from personal savings, assets, or profits from a previous venture.

Doing so provides the opportunity for full control, meaning you’ll be able to make decisions without the influence of internal investors. Equally, since this option doesn’t involve borrowing, you’ll have no debt to repay once your business is up and running.

However, it’s important to highlight that many people do not have sufficient funds at the ready to start a business. Equally, if funds are available, there’s the obvious risk of losing personal savings if the venture is not successful.

2. Family and friends

Seeking funding from friends and family is another popular option, but just like the above, it comes with its drawbacks as well as its benefits.

A trusted friend or family member may be willing to lend you the money to invest in an early-stage business, with the agreement that you’ll accept it as an equity investment, or return the funds (just as you would with a loan).

One obvious advantage of this route is that compared to traditional lenders and investors, family and friends are much more likely to offer you flexible terms. So, if you’re looking for funding for a small business with bad credit, this may be one of your more feasible options.

However, when borrowing from family and friends, it’s important to set out clear agreements, and for both parties to understand any repayment expectations and deadlines fully.

3. Government grants

If you’re looking for help funding a new business in the absence of personal savings or assistance from family and friends, have you considered looking into government grants?

The UK government offers a range of grants in support of specific industries. For instance, there are green grants offered to those aiming to enhance sustainability, as well as innovation grants and research grants. For more information on this, simply take a look at the government’s business finance finder.

With these things in mind, let’s dive into some of the pros and cons of government grants:

Pros:

• No repayments necessary: unlike loans, grants do not need to be paid back, giving you a means of getting your business up and running without the worry of future repayments.

• Retained equity: unlike options such as equity finance, you won’t be required to dilute ownership stakes.

Cons:

• Competition: government grants are highly competitive, meaning there’s no guarantee you’ll be accepted.

• Lack of flexibility: many lack flexibility, requiring the funds to be used for specific purposes only.

• Cash flow issues: sometimes you’ll be required to spend your own money first, later claiming it back with the grant. This may cause significant issues with cash flow.

4. Business loans

Wondering how to get a loan for a new business? Well, it’s time to dive into exactly what business loans are and look at the eligibility criteria surrounding them. While there are various business loans out there, here are a few of the most common:

1. Start-up loans: these are geared towards new business ventures, therefore there’s no need to show records of a substantial trading history when applying for one. Government-backed start up loans are typically between £500-£25,000, and if you’re accepted, you’ll receive up to twelve months of mentoring too.

2. Traditional loans: there’s also the option of borrowing with traditional loans, where you’ll borrow a set amount, and then pay this back (with interest) over an agreed repayment period. Your personal credit score will be checked along with your business credit score, and you’ll usually need to show evidence of profit and turnover.

3. Small business loans: Finally, there’s the option of applying for a small business loan, these usually range from anywhere between £1000-£50,000.
   

Business loans are used for a variety of different purposes, including purchasing new equipment, hiring employees, elevating cash flow, or perhaps relocating to a new premise.

Business loans can also either be secured or unsecured. With secured business loans, you’ll need to offer an asset as security, whereas with unsecured loans this isn’t necessary. With an unsecured loan you’ll usually need to provide a personal guarantee and commit to higher interest rates.

5. Peer-to-peer finance

Peer-to-peer lending is a type of business finance that involves individuals or businesses lending directly to others, cutting out the need for traditional banks. So, P2P finance involves matching lenders to borrowers on online finance platforms (these are regulated by the Financial Conduct Authority).

When applying, you’ll be required to fill out a form outlining how long you’ll need the money for, how much you’re hoping to borrow, and what the funds will be used for.

When the formal application has been submitted, credit checks will then be carried out. If you get accepted, you’ll be responsible for paying the loan back (plus interest) through regular, timely repayments.

One of the benefits of peer-to-peer finance is that you’re under no obligation to surrender any ownership. Equally, the lending process is simple, and peer-to-peer loans are usually processed fairly quickly.

However, it’s important to bear in mind that peer-to-peer lending platforms pose much higher fees than traditional lending.

6. Angel investors

Angel investors are typically individuals with high net worths, who provide funding to start-ups (usually in exchange for ownership stakes of between 10%- 25%). Some choose to invest alone, whereas others prefer to invest in a syndicate. With this option, you’ll need to prepare a solid pitch and convince your angel investor of your plan.

Angel investors usually target high-growth businesses. They are typically experienced, successful businesspeople, and you’ll therefore have the opportunity to reap the benefits of their expertise.

For businesses which are pre-profit, angel investors are an appealing option. This is because unlike routes such as taking out a business loan, there will be no need to repay or pay interest on the funds borrowed.

The downside of angel investors is that you will have to sacrifice equity as mentioned. Equally, finding an angel investor may require you to already have connections in your industry.

7. Venture capital

Venture capital is a type of private equity investment which focuses on early-stage businesses with the potential for high growth. There are venture capital firms which specialise in early-stage ventures, and these firms are prepared to take on the risk in return for what they hope will be impressive profits.

VC firms typically offer pre-seed or seed funding. If you have an idea, but need the funds to fashion a full plan or initial product for instance, then you may be eligible for pre-seed funding. You won’t need to demonstrate any revenue, but you will need to convince investors of your idea.

Alternatively, seed funding may be offered if you have a potential business/ product, and are able to explain how a VC investment will help you boost revenue.

Like the above, VC investors will typically require stakes in the business, and they may also require involvement in management decisions.

8. Crowdfunding

Lastly, crowdfunding is another common option when it comes to sourcing the funds for a new business. Crowdfunding allows you to raise money from a sizable online pool, but it’s important to highlight that success is dependent on a strong, compelling campaign.

First things first you’ll need to choose a platform, then write a convincing statement on why people should invest. For smaller, consumer-facing ventures this can be a great option, as there’s the incentive of the community reaping benefits too.

Which is the right option for me?

Selecting the right option is dependent on your business stage and funding needs, as well as things such as your comfort level with debt and shared ownership. It’s essential you carefully evaluate the pros and cons of each option, all while keeping your longer-term business goals in mind.

And, if you’re still unsure after considering all of the above, seek advice from a professional who’ll be able to guide you on the right path.

Hopefully our guide on how to fund a business in the UK has been helpful, and you’re now feeling empowered to take charge of your business-related finances.

But if you’re looking for more, make sure to head over to the Moneyboat blog for further insights. There, you can dive into our guides on using unsecured loans to start a business and payday loans for the self-employed.

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