How to finance a start-up business

More than 77,000 new businesses have launched since the outset of the pandemic. Some people decided to chase their dreams after Covid changed their outlook on life, others were forced to look at other sources of income once the job market dropped to its knees; some spotted a potentially lucrative gap in the market as a result of all the upheaval.

Whatever the reason, not everyone has a trust fund from a rich uncle to spend or significant savings with which to start trading. Most new business owners have to consider the various funding options available in order to realise their entrepreneurial dreams.

Business grants

Though the economy is currently quite rocky and funding pots have shrunk as a result, there are still grant opportunities available. The good thing about a grant is that it doesn’t have to be paid back, even when the business gets off the ground; however, because of this, funding organisations are quite picky when it comes to who they fund, and they commonly insist on specific criteria being met if your business idea is to be considered for funding.

A lot of business grants are underwritten by the government, so it’s worth looking at the GOV.UK website for further details.

Start-up loans

Keen to inject new blood into the world of commerce, start-up loans are also offered by the government as well as other organisations. As the word suggests, this kind of funding does need to be repaid; however, government-backed loans tend to be offered at a much lower interest rate than those given out by banks.

If applying for a start-up loan, you can typically lend more than a business grant would give you. Both require a robust business plan.

Crowdfunding

Plenty of successful businesses used a crowdfunding platform for the capital to launch their idea. The bonus being, as you promote your campaign and ask for funding from the general public, you gather ambassadors and loyal customers before you even open your doors. Of course, it’s not guaranteed that you will raise all the money you need (some businesses attract much more in funding than their original target); it’s a competitive market, and for every success story, there’s likely to be a handful of prospective business owners with dashed hopes.

Friends and relatives

Some people DO have rich uncles, or other relatives keen to help them see their business idea come to fruition. This is a great position to be in, and it’s also a good feeling to know that your loved ones want to see you succeed so much that they’d even invest their own money in your venture.

The only downside is that the money may come with strings attached, or that your relationship could be negatively impacted should the business fail.

Bank loan

In some ways, financing your business with a bank loan can be easier than winning a start-up loan or business grant, as most banks will not have specific criteria and tons of conditions relating to your business idea. If you can prove that there’s a market out there for what you intend to offer, if you can demonstrate that you’ve thought of every possible hiccup and already have the solutions, and if you can show that there’s a healthy profit to be made that will allow you to meet all the loan repayments, it’s unlikely that you will be turned down.

That said, a bank loan may carry a higher interest rate than alternative funding options, and it may require some kind of guarantee in case the business doesn’t realise its projected turnover in the timeframe suggested.

Investors

There are different kinds of investors, e.g. venture capitalists, angel investors, etc. and it’s worth doing your research to see which one would be right for you. As a general rule of thumb, investors give you the money you need in return for a share of the business. Once you’ve paid back their investment, however, they will still own their share, so it takes a lot of thought as to whether you could cope with a forever partner, albeit one that has limited involvement in the business. In some cases, you may be able to negotiate the buying back of your investor’s shares once they’ve recouped their investment.

Many investors make their money through their own successful businesses and prudent investments. They often fund promising young enterprises that have the capacity to grow very quickly. The expertise, guidance and network of contacts they may also share with you (which, after all, would be in their interest to do so) could be worth much more to your fledgling business than their financial investment.

These are the main ways to secure funding for a start-up business. It’s important to review the options separately and to consider the impact each would have on your business at the outset as well as a few years down the line.