There are so many benefits to starting your own business. You get to work on projects you care about, set your own hours, and be in total control of your future growth. However, one of the biggest hurdles that deters many people from taking the leap is money. You may think that if you don’t have enough start-up cash saved up, your dream of starting your own business is exactly that; just a dream. But it doesn’t have to be! There are so many different ways you can get the money you need, from bank loans and credit cards, to crowdfunding and angel investors.
In this article we will look at all the different funding options that can help you get your new business off the ground, and lay the foundations for a successful future.
How can you fund a new business in the UK?
Entrepreneurs and new businesses have long been the lifeblood of the UK economy, and so there are various avenues you can go down in order to pay your start-up costs and get your business up and running. While undoubtedly a little money in personal savings can help, it doesn’t matter if there isn’t a single penny in your bank account, as long as you have a great business idea.
Here are some of the options available to you:
A loan from friends and family
If you have friends or family who are supportive of your business idea and willing to invest in it, a loan from them may be the perfect way for you to get started. While many people are reluctant to get into business with loved ones, if it is just a small, short-term loan with clearly laid out repayment expectations, then it will give you that initial cash injection you need to get things up and running. This will then give you more time to secure more permanent funding or to self-fund after your business has started to make money.
A business loan from a bank or building society
Securing a loan from a bank or building society is one of the most popular options for businesses that need start-up money. There are many types of loans available, but the most commonly requested type is an unsecured business loan which will not require you to put up any assets like your house as collateral against the loan. The interest rates on these types of loans can vary significantly between lenders so it’s important to shop around before making a decision. As well as offering different loans amounts with varying interest rates, certain lenders may also provide additional benefits such as free advice from a finance manager at the bank who specializes in working with small businesses.
If you have personally been in business for a while, or you have other companies with well-established credit histories, it may be possible to obtain better interest rates on loan agreements and other assets like a business overdraft. Likewise, if you put up your home or vehicle as collateral on a secured loan, you are also likely to be offered more favourable terms.
Crowdfunding is a great way of getting the money you need to start your business, without having to give away any equity. If successful, crowdfunding also works as free marketing for your new venture as well!
There are two different types of crowdfunding; rewards based and debt/equity based. Rewards-based crowdfunding works by giving out small rewards in return for people pledging their support towards funding your project or idea. This is a good option if your business has a product you need to manufacture or otherwise fund, and the costs associated with it are relatively low.
Debt/equity-based crowdfunding is more complicated than rewards based, but it’s also potentially very lucrative for both investors and businesses alike. When dealing in debt-based funding, companies that receive donations from backers will owe them money once they’re up and running. If successful, equity-based crowdfunding will allow your new business to bypass banks and other traditional lenders by selling small shares in your business at an inflated price. The idea being that as you grow larger these share prices should increase and give your initial crowdfunding investors a potential profit.
Whichever avenue you choose, keeping track of who owes what can be tricky when working out payments, so make sure you do your research thoroughly before starting any crowdfunding campaign.
An angel investor
An angel investor is a wealthy individual who provides capital for new and growing ventures. In exchange, the investor is given ownership equity in addition to a percentage of future profits or revenues from business activities. The number one benefit of working with an angel investor is that they typically provide high-risk funding without many stipulations as they are willing to take on riskier investments in return for potentially larger returns later down the road. However, you should be selective when choosing an investor because there can be some drawbacks if you make the wrong choice. A lot of angels will only fund projects within their own specialties so you may need to shop around a little to find an investor willing to back you.
Other benefits of bringing an angel investor onboard include tax exemptions, no requirement for collateral or credit checks, flexible payment schedules (weekly/monthly instead of quarterly), and the ability to get business advice and mentoring.
How to secure funding
Whether you are trying to get funding from a bank, an investor, or even from a family member, it is absolutely vital that you have a comprehensive business plan to show them your vision for your new business. This will assure any potential investor that you know what you’re doing, and that their money will be safe. You need to include even the most minute details in your business plan so that you have every penny covered.
Here is what potential investors will expect from your business plan:
- A concise executive summary – This should include a brief description of your business, what it does and its future goals.
- An overview of the market – This should be a thorough analysis of how big or small that market is with some comparison to other markets in order for investors to get an idea on any potential growth opportunities.
- Competition analysis – How many competitors are there? What do they offer differently from you? Where are their strengths/weaknesses compared to yours? Who are their clients/customers? How do these factors influence where you can find new customers too etc.?
- A SWOT analysis (Strengths, Weaknesses, Opportunities & Threats) – A SWOT analysis will help give investors more insight into what’s going on behind the scenes at your company. This will give them a better idea about whether your business is worth investing in.
- Detailed information about your products or services – This will include your cost structure and how much money you will need for manufacturing and inventory.
- Details about who your target customers – Including who they are and how you plan on reaching out to them.
- Your marketing strategy – Including include how you plan on stirring up interest in your business, how your main competitors do their marketing, and a full breakdown of your marketing budget.
Investors want to know as much as possible before risking their money, so leave no stone unturned when it comes to your business plan. If in doubt, put it in the plan; if potential investors are not interested in that point, they will just tell you to skip on during your presentation.
Speaking of which…
What you need to know for an investment pitch
Anyone who has ever seen Dragon’s Den knows how important (and daunting) a pitch to investors can be. You need to be able to sell not only your business, but yourself as well. Here are some important tips for making a winning investment pitch:
- Be professional – Don’t forget that a big part of selling yourself and your business will be how you present yourself. Even if the investor is not interested in this particular business, they could potentially invest just to get access to you later on down the road.
- You only have thirty seconds…or less! – This might seem like an exaggeration, but investors need to see if there’s any potential in your business right away. If they don’t feel compelled within the first thirty seconds, the chances are slim that they will ever become interested so make sure you have all of your best points prepared beforehand!
- Never argue with potential investors – This may sound obvious, but its amazing how many people look their cool under intense scrutiny from potential investors. Remember that you are asking them for money, not the other way around. Be determined but humble, and if they have feedback or advice that you disagree with, just listen politely and chalk it off. There will be plenty of other fish in the sea.
- Know your numbers – This is one of the biggest mistakes that people make during a pitch and there are few things more certain to turn a potential investor off. Make sure you know your numbers inside and out. If you don’t know them, how can an investor trust that you will be able to grow the business in the future?
- Under promise, over deliver – No one wants a bad surprise when it comes to their investment so make sure that what you are promising is achievable with enough hard work put into it. Don’t sell yourself short but also try not to get over ambitious either.
The chances are high that there could be other people pitching similar ideas at the same time as you so make sure that yours stands out by being positive and professional throughout.
How to manage your business finances
Once you have secured financing for your new business and got it up and running, you need to take care of the money. Many new business owners are experts in their field but don’t have much knowledge or experience in financial matters, and if this is true for you, seek help wherever you can find it.
The first step to managing your business’s finances is to open a business bank account. This means that you can separate your money into personal and business expenses, which will help you to keep track of what’s coming in and out. Business accounts also come with other benefits like credit cards and bigger overdrafts than those available through personal accounts, so every new UK business owner should open a business account as soon as possible!
The next thing you may want to consider is hiring an accountant. This will help you to understand exactly what is coming in and out of your business, and will ensure that you are declaring your business taxes correctly so that you won’t risk any penalties. Accountants can be expensive, so if you don’t want to pay to keep one on retainer, just consider hiring one at the end of each tax year to take care of your returns.
Register your new business with HMRC
In terms of taxes and other legal considerations, you need to register your new business immediately if you want to avoid potential penalties. Many new business owners are unsure about how to register but the process is actually very simple.
The first step is deciding on the type of business structure. The most common are sole trader, partnership and limited company. Each has their own pros and cons so you should research them before choosing one for your new venture! Once you’ve decided on a legal structure, contact HMRC online and register your new business.
To sum up
There is so much to consider when starting a new business from the right location to the best suppliers, but all of that requires money. If you don’t have enough start-up capital then don’t give up on your plans because there are so many different financing options. From seeking an angel investor to borrowing money from the bank, as long as you have a great business idea and a detailed business plan, you should be able to secure the funding you need to get your business up and running. Follow this simple guide, and you will soon be making money with your brand new business.