One of the most exciting things you can do is go into business for yourself. But on top of all the other decisions you have to make, like figuring out your unique selling proposition (USP) or writing a business plan, you also have to think about how you’re going to pay for those scary first few months.
Finding money to start a small business can be hard, so here is a guide to the options you have in the beginning.
10 ways to find small business startup funding
#1 – Bootstrapping your business
You’re basically pulling yourself up by your own bootstraps, which means you’re funding the start of your small business yourself, either through savings or, if it’s a side job, by using some of your monthly salary. Or you could charge as much as you can on your credit card and hope for the best.
You keep all of the equity in your business and don’t have to answer to anyone.
It costs money to become a sole trader, whether you register at Companies House or build a website, whether you do it yourself or hire a web designer. Once you start advertising on Facebook, you’ll be surprised at how quickly your personal bank account empties before those online sales go through.
Family and friends
There is no shame in asking family and friends for money. If they think you are trustworthy, they will give you the money. Think of it as your first research into the market.
Or, they could invest in your new business in exchange for a stake in it.
It’s a simple deal where you agree to pay back the amount you borrowed plus an extra amount. Also, it’s easy to set up.
Put everything in writing if you’re taking on an equity investment. And have a salesperson take a look at it. There’s a lot of room for family problems here, especially if your business does well. I know of a family whose son made a well-known brand. What seemed like a harmless shareholding that was given to a grandparent is now worth millions, and the whole family is fighting over it.
#2 – Bank loans
A proverb says that banks will only let you borrow an umbrella when it’s sunny and will take it back when it starts to rain. It is very important to know that banks lend money and do not invest in your business. Bank loans are not a good way for a small business to start out because they usually need proof of past profits.
There are two kinds of loans: unsecured loans, which are often called overdrafts, and secured loans, which require you to put up a personal guarantee, like your home, if your friendly bank manager agrees to give you the money. If things don’t go well, you might end up without a place to live. Touker Suleyman, who is on the TV show Dragons’ Den, said that he lost his house to Lloyds Bank because he used it to get a loan. However, he still did business with the bank.
If you have a personal account, this is likely the first place you’ll go. Setting up a business account is pretty easy, as long as you can prove your identity. At the same time, you can get an unsecured overdraft or a business credit card.
It can take a long time to get a bank loan. And banks aren’t afraid to call in debt collectors if you keep missing payments, which can be scary.
#3 – Fast loans
Small business startup funding has changed a lot because of technology, especially if you run an e-commerce or retail business. PayPal, a big name in online payments, has a service called PayPal Working Capital merchant advance. You can pay it back through a recoupment corridor with money from sales you make through PayPal. Iwoca has a similar revenue-based loan, as well as a digital product called Flexi-loan that lets you get a loan in minutes. Funding Circle, on the other hand, sets up loans of between £10,000 and £500,000 that are again approved in minutes.
Fast business loans that use open-banking technology are becoming more and more popular with SMEs because they are fast, easy to use, and clear.
Aside from revenue-based lenders, the next generation of SME lenders will want to look closely at your financial records. This makes them unsuitable for a complete startup. Also, interest rates can be high, which can drain your savings.
#4 – Start Up Loan
Start Up Loans from the government range from £500 to £25,000 and can be used to start or grow a business. This is an unsecured personal loan for people who can’t even borrow money from their own banks.
Start-Up Loans are backed by the government and have a fixed rate of interest of 6% per year.
You have from 1 to 5 years to pay back the loan. There are no fees to apply or to pay off the loan early.
Last year, the government said that over the next three years, it would pay for 33,000 Start Up Loans.
You can get free help and advice to write your business plan, and if you are successful, you can get free mentoring for a year.
As with any loan, if your business idea fails, the payments can quickly become a burden.
#5 – Crowdfunding
Great for business products that are unique or creative and get people thinking. Seedrs and Crowdcube are the two largest crowdfunding sites in the UK. Through crowdfunding platforms, most investors put in between £100 and £50,000. So, a company that raises £100,000 could have hundreds of shareholders. Brewdog, Monzo, and Peleton are just a few well-known brands that have used crowdfunding. Brandon Sanderson, an American fantasy writer, recently tried to raise $1 million for four books he wrote during the pandemic. So far, his Kickstarter campaign has raised nearly $42 million.
Again, crowdfunding is a great way to find out how much people want your product or service. Shareholders can help a business by speaking up for it.
A crowdfunding campaign with different levels of rewards for investors needs a lot of planning.
And for a campaign to be successful, you need 30–40% of the money you’re trying to raise to be pledged before the campaign starts (the crowd follows the crowd), so you still need to find backers first.
Also, the average amount raised through a single crowdfunding campaign around the world is $794, and the average amount raised through multiple campaigns is $30,339. Also, only about half of the crowdfunding projects ever get money. What happens if you fall short of your goal?
#6 – Angel investors
Angel investors are often former business owners who know a lot about your field. So, if you buy some of the stock first, you might get a good mentor or advice.
Most likely, the amounts will be between $5,000 and $100,000.
According to Beauhurst’s study, angel investors put more than twice as much money into private UK businesses in 2021 as they did in 2020, from $11.3 billion to $22.7 billion. In fact, in 2021, angel investments in unlisted UK start-ups were bigger than crowdfunding for the first time since 2014.
Angel investors are willing to invest with just a back-of-the-envelope plan, and they are patient capital because they know they have to wait to be paid back before you can raise more money.
You’re no longer in full charge of your business, and you might end up with a partner who doesn’t leave you alone.
#7 – Venture capital
The next step after angel investment is venture capital, which often involves millions of pounds. Because of this, it is not a good way to get money to start a small business.
But venture capital is getting involved in more and more of the early stages of funding a new business. This type of funding, called “pre-seed funding,” is very simple. Early-stage venture capital fund RLC Ventures says that pre-seed rounds start at about £150,000 and go up to £500,000.
At this point, venture capital isn’t just about money. It’s also about advice, networking, and planning.
You’re giving up a piece of your business, just like any other investor. Plus, venture capital is looking for BIG ideas that address HUGE markets, so it’s not good for, say, a dry-cleaning business or a gardening business.
#8 – Bootcamps and incubators
Bootcamps and accelerators are places where startups and companies in a certain area of technology can get help and mentorship. Most programmes last between three months and a year. For an initial seed investment of usually between £10,000 and £30,000, business accelerators often take 5–10% of the business.
For example, in March 2020, the British cosmetics company Five Dots Botanics will join the Sephora Accelerate program. The big US cosmetics company picks 12 companies around the world that are run by women. “We want to take the company to the next level,” the company’s founder, Zaffrin O’Sullivan, told SmallBusiness. “But to sell all over the world, you need operating cash.”
Mentoring from experts, seed funding in the form of equity, and a chance to “get in the room” with investors who are interested.
The application process can take a long time and be hard, and you have to make time to go to accelerator events and network.
#9 – Grants
#10- EIS and SEIS
SEIS and EIS are tax-based investment plans that the government backs to get people to put money into small businesses. Since it began in 1994, the EIS has become more focused on companies in the knowledge-based economy and investors must be willing to take on real risk. At one time, there were too many scammers in the financial services industry selling EIS schemes to investors. These schemes offered tax breaks with low risk.
EIS encourages investment in innovative start-ups. According to HMRC, in the 2020-21 tax year, 3,755 companies raised £1,658m through EIS.
You can raise up to £5m (or in some cases £12m if your start-up is “knowledge-intensive”) through EIS.
The EIS’s sister program, which was set up in 2012, gives investors in very new businesses even better tax breaks. In 2020-21, just over 2,000 companies used SEIS to raise a total of £175 million.
Under SEIS, the most money you can get is £150,000.
To be eligible, your start-up must:
- Trade must be less than two years under SEIS or seven years under EIS
- Have fewer than 25 employees under SEIS or 250 employees for EIS
- Have no more than £200,000 gross assets or £15m for EIS
You can find an HMRC guide to SEIS here.