How to finance a new business | Investors, loans & grants

Finding funding for your new start-up business can be hard. Here, we walk you through some popular options and how to find them.

They say there are two things in life you can be sure of: death and taxes. We would argue there is actually a third: starting a business is difficult. Getting a business off the ground needs capital, whether that be financial or sweat capital.

However necessary it may seem, being successful isn’t impossible without a hefty startup fund. Let’s begin with a couple of feel-good stories of companies that made it big with the smallest amount of capital behind them.

First, a little inspiration

Just one year before the start of the Second World War, a business was formed in a garage in the small Californian city of Palo Alto. Set up by Bill Hewlett and David Packard, the company that bears their surname had an initial capital of USD 538 ( $10,000 in today’s money).

After merging with Compaq in 2001, the company sold its 51-percent controlling majority share to Tsinghua Unigroup for at least  $2.4 billion in 2015. At this time, the company was registering net income of over  $5 billion and owned assets of  $103 billion.

Another global success that started from the very bottom is Pete’s Super Submarines, although you may know it better by the name it changed to in 1968: Subway. Three years earlier, Fred DeLuca had borrowed USD 1000 from a friend to start up his own business (around $8,000 in today’s money).

Fred had originally wanted just enough money to afford his medical school tuition – instead, he created a global behemoth. Today, Subway has more than 42,000 locations across 111 countries and can claim to be both the world’s largest single-brand restaurant and largest restaurant operator on the planet.

What is business funding?

Here, “funding” means “cash” – it’s really that simple. A business needs cash to begin trading, in one form or another.

You may think “my business is an online service business, I don’t need cash to start up – I just need my computer!” – but where will you plug your computer in? How do you pay for your internet connection? How did you buy that computer in the first place?

Whatever your business requires becomes a financial liability of your company and needs funding (cash) to run. You can learn more about corporate finances in our “what is bookkeeping?” article.

Funding can be secured in a number of different ways, but it is important to select the right funding for your business. Some are fortunate enough to have money behind them, so are able to fund the business themselves, while others look to family or friends.

More “official” forms of funding can be found in government funds, grants, bank loans or specific companies that choose to invest in small companies they see potential in. It can be a bit of a minefield, which is why we are here to help.

Let’s take a look at the options.

Government funding

Government funding is the first port of call for many start-ups. This is still a very useful avenue and offers a number of more ‘official’ incentives, such as tax credits, 6% start-up loans, regional growth funds and even competitions.

For more info, go to the government’s official site.

Pros: There are numerous opportunities with government funding which means finding the specific kind of funding needed for your business is more likely. There are various loans, often with low-interest repayments, and grants which you will not need to pay back.

Tax ‘discounts’ help in that they improve your cash-flow to allow for business growth. Rather than giving you cash, they work by saving you money. Overall, it is in the government’s best interests for your business to succeed – more revenue means more tax!

Cons: The greatest barrier to pursuing start-up funding from the government is that it can be a laborious task involving numerous meeting, forms and hassle. Further, there could be many strings attached and numerous hoops to jump through for a considerable period of time.

Small business grants

Although government-funded, this is worth a few words on its own.

Pros: There are literally hundreds of different start-up grants available, depending on your industry, location and size of your start-up. Obviously, they are very popular as, unlike a loan, you do not have to pay any of it back.

This means your business does not immediately plunge into the red before you’ve even started.

Cons: There are literally hundreds available!

Some people can be put off by the huge number and it can be tricky finding which grant suits your type of business.

Funnel down your options and apply for the right loan for your business here.

Angel Round investment

An angel investor is one who puts money into your company and takes a chunk of ownership equity in return. In small start-ups, this is often a family member or friend who sees potential in your idea and wants to help out.

Pros: Angel investors typically have cash ready and can therefore get money to a small business very quickly. Further, you don’t have to put up any private assets as a guarantee on the money and there are no interest-laden repayments.

Cons: While this is certainly an option worth looking into, remember the strain on relationships this type of business arrangement can cause if you are to borrow from people you know.

When it comes to companies, be aware that you will lose complete control of your company and may have to move it in a direction you are not entirely comfortable with.

For more information on this type of funding, visit the angel investment network or   or the UK Business Angels Association.

Venture Capital Round

Now, we are talking serious investment – not just the kind to get a small business off the ground. Venture capital involves private equity firms investing in your company through a series of stages or “rounds”.

In 2019, venture capital investment grew by 44% year-on-year, with more money invested in the UK than in Germany and France combined.

Pros: This kind of investment can bring a huge amount of money in from the very beginning, meaning you can concentrate solely on developing your business. The type of money raised in VC rounds would not be available from the previous methods mentioned.

These firms can also offer valuable relationships, professional advice and a network for your company as it grows.

Cons: VC round funding should definitely not be viewed as a sure thing, as you will need to have many factors in place beforehand, such as networks, a detailed business plan and a mentor to coach you through the process.

It can also get complicated, meaning there is a very good chance of you having to pay for legal help in order to complete deals. VCs can also take a long time to make their decisions and there is always the possibility your company could be undervalued if you choose the wrong investor.

However, if you wish to explore this option then Startups is a good place to start.

Incubators

Usually located in one place, this is an organisation that helps with workspace rentals, equipment, seeding rounds, training, legal help and advice. Here, you can mix with others in the same boat and share tips, ideas and advice.

There are currently around 200 incubators active in the UK.

Pros: On an everyday level, it means that you have some company and are not stuck in the corner of your bedroom all day. Financially, you could save up to 50% of your start-up costs – such as office space, electricity, printers, etc. – by choosing to set up in an incubator.

You are also more likely to be spotted by an investor, as they tend to keep a close eye on new companies – especially as there are multiple gathered in one place.

Cons: Of course, they are often restricted to large cities, so many not suit everyone. Also, make sure there are no hidden costs when you sign up or that the incubator is due a slice of any future profit. One further disadvantage is that you are reliant on the skills and knowledge of the incubator team that is in place at the time and they may not be up to standard.

Debt funding

This is essentially the opposite of equity financing and involves selling debt instruments to money lenders. Much in the same way that when you want to buy a house, you have to get into debt to buy it and, once that loan is paid off, you own the house.

Pros: Debt-financing means that you do not give up any stake in your company and can remain in complete control. Barclays, Natwest and HSBC all have favourable debt-funding options, while newer alternatives, such as Mettle and MetroBank, are also now competing for business. Medium.com’s excellent article on which one to choose is worth reading.

Cons: In all honesty, it is unlikely you will be able to walk into a bank and convince them to invest in your start-up business – no matter how good your idea. The simple fact is that start-ups are risky investments and have little or no collateral behind them if things go badly.

The debt also has to be paid back in full, regardless of how the business is faring. As your company is not fool-proof, the interest level on your loan is likely to be high, meaning you end up paying back a lot more money than you borrowed. The typical interest rate is around 8%, so for every £1000 you borrow, you will pay back £1080 before you are debt-free.

Crowdfunding

This is a decent option for companies who want to produce a good rather than a service.

Crowdfunding, as the name suggests, invites people to invest money through a website in return for shares in your company. Websites such as Seedrs and Crowdcube as accessible, easy-to-use and safe, while Kickstarter was an early trendsetter and has even been used as a synonym for crowdfunding in some areas.

Crowdfunding can also be used for specific products. In this case, people invest a certain amount of money towards a set target. Once this has been reached, each investor gets one of the products in question and you keep the rest.

Pros: This allows companies to get their first product off the ground, raises awareness and gains you free word-of-mouth advertising.

If the target isn’t met, those who committed funds do not have to pay up. It also doesn’t cost you anything but can result in excellent marketing and feedback – your investors become your best market. Last year, the average funding per campaign in the UK reached £11,796, with the sector estimated to be worth over £50 million by 2024.

Cons: Crowdfunding is not a guaranteed source of income, on which you can rely. If you don’t meet your target amount, it is very unlikely you will get any cash whatsoever. We would highly recommend against this course of action as your sole source of income.

No funding

Pros: Yep, you read that correctly. Some people don’t need any funding for a business, particularly if they provide a service. By saving a little cash, companies can get everything they need in place through having a home office, using public transport, using older equipment they already have and not employing anyone to begin with. You also know exactly how much money is there and maybe more careful if it is yours.

Cons: Very few people have the large amount of money needed to start a business lying around or in savings. Further, if your company does not succeed, all of your hard-earned cash will be lost. This is not for everyone, so please have a think before deciding whether you need business growth funding.