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Financing a new startup business is one of the most crucial aspects of helping a new venture to succeed. However, obtaining finance can be a difficult process and there are many options that will likely need to be explored.
For example, borrowing money from a mainstream bank may not be an option or only possible with security conditions such as a personal guarantee.
One of the most important aspects that a startup needs to have in place before raising finance is to ensure that they have a business plan. A well-prepared business plan can help with many aspects of a new business including helping to raise funding. This will help potential funders to understand more about your business, how much money you need, how you intend to use it and how they will be repaid for their investment.
Below, we list some of the most common ways that startups can access funding in the UK. Many businesses will end up using a mix of these different financing options.
Family and friends
One of the most common forms of funding for startup business ventures is via friends and family. This can typically be by way of either an investment or a loan. This can be easier and quicker than traditional methods. However, there are issues to be considered especially involving interpersonal relationships if things go wrong.
For many startups, it is important to look at what business grants are available. A business grant is essentially a sum of money awarded by the Government or another type of organisation to help fund a business. There can also be a lot of different businesses competing for the same grant funds. One of the main benefits of the grant is that the money is not usually repayable where the terms of the grant are met.
Debt funding is where a business borrows money but does not cede any control of the business. This is a loan that needs to be paid back and it can be difficult to access this type of funding for startups especially from traditional banks.
One example of a Government-backed scheme is the Start Up Loan scheme. This scheme offers personal loans to individuals looking to start or grow a business in the UK. Applicants that are accepted are also paired with a business mentor for 12 months. This loan is unsecured and all owners or partners in a business can individually apply for up to £25,000 each, with a maximum of £100,000 available per business. The average loan amount through the scheme is in the region of £7,000.
A bank overdraft (if available) can provide quick, flexible cashflow. The idea is simple: you dip into the overdraft in the leaner months and come back out when the business picks up.
There are many options available for equity finance. This is where the startup business essentially sells part of their stake to help raise much need funding.
This type of funding can typically help startup businesses to gather enough funds to start in business. In many cases, investors do not receive any equity in the business for investing but may be offered a reward of some sort. If the investment is in an equity-based crowdfunding scheme then the investor will receive a stake in return for making an investment.
Angel investors and angel networks
Angel investors are typically high net-worth individuals who choose to invest directly in startup companies. Angel investors provide not only financing but also usually offer their skills and experience to help grow a business in the early stages.
This could be the first source of serious investment a startup will secure before moving onto a venture capital round or other funding sources. Angel investors typically invest from £10,000 - £250,000 in return for equity in the business.
Venture capital is a type of financing that investors typically provide to early-stage, innovative small businesses that are believed to have excellent long-term growth potential. This can be an essential source of finance for both the business owners looking to raise funds and the investors they attract.
Venture capital typically provides finance and advice for businesses in technology-based sectors such as cybersecurity, fintech, AI, educational technology, life sciences, and medical technology.