The UK has around 5.7 million small businesses; owned by people like you.
Many of them dreamt of becoming their own boss and took the leap as soon as the time was right. Others became entrepreneurs as they had skills, products or services that they hoped would make them money. Some may have launched their own business due to redundancy or long term unemployment.
Whatever these ventures sell or do, these 5.7 million enterprises all have one thing in common. Their founder or founders first had to answer the question: “How to finance a start-up small business”.
This can the biggest hurdle to get over. The other thing holding you back could well be confidence. However, self-assurance as your own boss will grow once you have the finance to start your business!
Here are some of the best answers to the puzzle of how to finance a start-up small business.
- Self financing a new business
- Traditional commercial lenders
- Friends and family
- Peer to Peer lending
- Public sector funding and trade grants
- Next step for business start-up funding
- Next step for business start-up funding
Self financing a new business
The colloquial term for this is “bootstrapping”. It involves using existing personal finance to invest in self-employment.
According to one report, only 36% of small businesses now use external finance (down from 44% in 2012) to get off the ground. The rest base their enterprises on existing funding.
For example, you may have a redundancy payment or savings that you can use as your initial business capital.
Some entrepreneurs finance their new ventures by taking out secured or unsecured personal loans, remortgaging their home or borrowing on credit cards. All these carry risks – especially if large sums are involved. You need to have a strong business plan – which includes a reliable source of future income – to avoid getting into serious personal debt.
Bootstrapping can also include running your new business on a minimal amount of startup capital and then trading using merchant credit. For example, you buy your candle making ingredients from a supplier on the clear understanding that you can’t settle the invoice for at least 90 days. Then you work hard to make and sell the candles quickly and pay the supplier at the end of your initial trading period.
Operating a new small business on “credit” can also involve buying equipment, premises and vehicles under hire purchase type schemes. This spreads the costs over an agreed repayment term and includes various levels of interest.
You could also fund a start-up business by arranging an overdraft with your bank or using an existing one.
These various forms of “self-financing” all require a high degree of faith that you have a ready market, to avoid being dragged down by future debts.
Traditional commercial lenders
Traditional business lenders do accept loan applications to finance a start-up. However, these days they are far more cautious about commercial loans. This means that you will need to have a sound business plan, with clear financial projections, to show them that they will get a good return on the value of their loan.
Presentations to banks and other commercial lenders can be daunting, but if you go in with all the facts and a degree of confidence, it’s a way to finance a start-up small business.
Which banks are most willing to lend to new businesses? An existing relationship with the bank will help. As will having a healthy business credit score (get in touch with us if you’re not sure what yours is, or if you have one).
Some of the smaller and newer banks may be more open to your approach than some of the bigger high street lenders.
One study found that larger, older banks rubberstamp around 26.9% of the applications they receive for lending to small businesses. Whereas relative “newcomers” approve around 50% of business loan applications. Also, some of the institutional lenders – which are commercial-only banks and specialist funding associations – are willing to say yes to around 64.7% of loan applications.
If you don’t have your own start-up capital – and bank loans are out of the question -one of the first questions you will need to consider is how attached you are to the idea of “going it alone”?
Making sure you have enough cash to get a new business off the ground is one of the main reasons why entrepreneurs seek a business partner.
Creating a partnership – involving two or more individuals – can attract more start-up capital from each person. It also spreads the risk if the business runs into financial difficulties.
However, partnerships in themselves can bring issues. It’s extremely important that you only choose to create joint business ventures with other people if you have strong synergy. This involves a shared business vision and complementary skills and personalities.
If partners clash it can lead to unwelcome business interruptions and distractions. If partnerships have to be dissolved, it can have serious cost implications and even make the remaining business “unviable”.
Friends and family
Another great solution, if you’re wondering how to find finance a start-up is to approach your nearest and dearest to back you.
Lending money from friends and family usually means you can pay it back in a far more flexible way, and with far lower rates of interest! In fact, some start-up business owners pay their friends and family back “in kind”. So, for example, if you’re becoming self-employed as an electrician, you can offer “investors” free services for life.
There is a modern and wider sweeping alternative to raising funds from friends and family called “Crowdfunding”.
This involves a choice of online platforms that each enable you to find business start-up capital from a multitude of small investments.
The best known of these platforms are Kickstarter, Indiegogo and Crowdfunder, but others include RocketHub, Seedrs and Crowdrise. There are some that specialise in particular sectors; such as PledgeMusic and Sellaband.
These crowdfunding sites are used by private individuals, limited companies as well as charities to raise money. However, done properly it’s possible to crowdfund a new business start-up.
The key is to create a profile that shows what’s special about your venture, and the business goals you have. Then, promote the page heavily to friends, family and on social media. Members of the public can then pledge small sums, in return for such things as discounts, goods or services in kind, or a share of future profit.
Be careful not to oversell what you’re offering, and keep your target crowdfunding total realistic.
Peer to Peer lending
This is actually similar to the above when it comes to ways to finance start-ups.
It is another option that’s grown out of the digital age, as it is based on websites and apps.
Peer to peer lending is an increasingly popular way to generate cash for a business launch. This too involves “pitching” your business proposition online. You will then be matched to individuals or organisations who are looking for investment opportunities.
The key to success with this option is to carry out “due diligence”. This involves thorough research and careful checks, to ensure the investor matched to you is genuinely the best option to put start-up cash in your venture. Reading the “small print” can save you a great deal of stress and problems further down the line.
Public sector funding and trade grants
UK business start-ups have access to a number of low-risk opportunities to lend money, which are supported by the Government.
Public sector new business loans – and some specialist grants – can be an excellent way to fund your initial capital, or top up the business cash you already have.
There are lots of different types of public sector funding (this site lists around 177 different local and regional schemes https://www.gov.uk/business-finance-support).
If you do your research – or seek advice for funding a start-up – you could find ones that are relevant to your venture. You may even find that you tick all the right boxes for grants; for example if your product is particularly innovative or you offer strong employment prospects in an area of high unemployment.
One to look at is the Government-backed Start-Up Loan scheme, which offers sums of between £500 to £25,000. It is an arrangement similar to an unsecured personal loan.
Angel investors, accelerators and other private sector backing
Much of the “crowdfunding” and peer to peer lending outlined above will come from interesting individuals.
There are also successful business people and existing companies who look for new businesses to back.
This is sometimes referred to as “investor angels”. They don’t just offer loans to start-ups of interest, they often provide valuable contacts, mentoring and skills-injections.
Look out for Business Accelerator programmes too. These also offer a range of support services (including access to investors) to put small businesses on the path to stability and growth. This could include office or manufacturing space within an “incubator” unit, with minimal rent for example.
Some accelerator schemes are geared towards “seed” programmes, to get new businesses off the ground. Others are designed to provide “second wave” funding and support for young enterprises that are already trading.
Next step for business start-up funding
This guide to financing a new business would not be complete without mentioning how wise it is to seek the advice of a relevant third party. No matter how well you know your market, product or service, and no matter how skilled and astute you are, financing start-ups is complex. Not least as almost a third of new businesses fail, as their owner runs out of cash!
You need a well thought out and realistic financial basis to start your business, and then you need to manage your finances carefully to keep afloat during those tricky first months. That way, whatever route you chose to finance a start-up new business, you’re on your way to thriving, and not just surviving.
Contact us for more insights on how to finance a start-up or young enterprise.
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