According to StartUp Britain, the Government-backed entrepreneurship initiative, 425,721 new businesses have been launched so far this year.
One of the first hurdles an entrepreneur will face is raising funds for their start-up. With the year-on-year growth of start-up companies in Britain, there are a number of ways of financing your new business. From grants and loans to crowdfunding and angel investors; read on to find out how to finance a start-up business.
Family, friends, and contacts
A growing number of entrepreneurs are turning to their friends, family, and contacts to seek initial start-up fundraising before considering other options.
It’s important that if you go down this route, you draw up a business agreement, present them with a business plan and financial forecast. Make sure to clarify whether they will receive any financial liabilities, the rate of interest or if they are only investing based on sentiment.
Using your contacts as a pool of investment is perhaps even more valuable as not only do they value you for your expertise and business idea, but they may be able to provide you with impartial advice and feedback, more so than your family and close friends.
With the likes of Kickstarter and Indiegogo, crowdfunding for investment has grown in popularity. This is not only a great way to raise funds for your start-up but it is a good way to gauge the opinions and feelings towards your product, idea or brand.
There are four types of crowdfunding, ranging from:
- Donation crowdfunding – people donate money based on their belief in your idea and want nothing in return.
- Equity crowdfunding – people invest in your start-up in exchange for shares or a stake in the company.
- Rewards crowdfunding – people provide funding for your start-up and receive the first batch or release of the new product at the discounted price.
- Debt crowdfunding – people lend you money and expect to receive their money back with interest.
There are a few drawbacks to crowdfunding. If you have a complex business idea, the general public may find it difficult to identify with the business idea and therefore lower the chances of you reaching your crowdfunding goal.
This leads on to the fact that if you don’t reach your crowdfunding target, any finances pledged are returned directly to the respective investors. This not only takes you back to square one but a failed crowdfunding campaign can damage the reputation of the start-up before it has even begun.
An angel investor uses their personal finances to provide capital for a business and in return will normally take shares in the business. Angel investors normally play active roles in the business development and part with their years of experience and industry knowledge, to make sure they have the best chance of seeing a return on their investment within three to eight years.
If the business performs well, both parties reap the financial benefits and on the flip side, if the business fails, the angel investor would not normally expect to receive their initial investment back. As a result of this, many angel investors will go beyond providing just startup business finance and you can’t really put a price on having their business expertise at the early stages of a start-up.
You will, however, have to give up a portion of your company, so you will need to weigh up their value and whether or not their offer justifies the equity stake requested.
Not to be confused with angel investment, a venture capital (VC) is a collective of private investors or specialised financial institutions in the form of venture capital funds, investment banks, and pension funds.
Similar to angel investments, VC’s normally provide support in the form of business guidance, financial and human resource management. However, the price you pay for receiving an investment from a VC is generally in the form of equity with many VCs demanding more than a 50 percent stake in the company, resulting in you losing a controlling stake.
UK Government start-up loans and grants
Start-up companies are regarded by the UK government as the all-important seed for the growth of the UK’s economy. The Start Up Loans scheme which was introduced by UK government offers loans up to £25,000 with an annual interest rate of 6%. The loan has to be paid back within five years.
Sir Richard Branson has also shown his support for start-ups with his Virgin StartUp Loan scheme offering an average loan of £5,000, which you will need to pay back within three to five years with an interest rate of 6.17%.
A portion of the UK taxpayers’ money is set aside each year for business grants and new enterprises. You can get access to such funds for your business by applying to national and local organisations, who will assess whether your start-up is eligible for a grant or not. These are notably more difficult to get than the Government’s start-up loan schemes.
This is perhaps the more traditional way of thinking of how to get funds for your start-up. However, this is one of the more difficult ways of raising finance for your business.
Each year it is estimated that the British Business Bank rejects some 100,000 loan applications from small businesses, representing an estimated £4 billion funding shortfall. Since the financial crisis, banks are more risk-averse and unless a start-up has a substantial track record or holds valuable assets, it is unlikely that they will receive a bank loan.
Getting funding for your start-up is crucial to its stability and early-stage growth and it’s important to assess all the options available and to decide which is best for you and your start-up.
If you’re looking for Manchester city centre offices to get your new business up and running, contact Accelerate Places coworking spaces today. Our serviced office space in Manchester can help you take advantage of working with similar organisations, host a business event, and get on the right path to achieving your start-up goals.