Many startups begin operating by self-funding their ventures, particularly at the very early stages if they’re not yet ready to take to raise funds through the more common avenues of selling equity or taking on on debt. As well as bootstrapping, there are a number of alternative financing options available for startups (which don’t involve forms of equity fundraising or debt financing) that are discussed below.
Best suited to startups very early on when there are no or limited team costs.
Rather than hunting for capital from external sources, founders use their money and income to bolster the company, concentrating on functioning at the lowest possible cost.
Advantages of Bootstrapping
- Avoid the lengthy process of looking for investors.
- You maintain control of the company, with no requirement to answer to any investors.
- Bootstrapping forces you to get creative with your money and how you use it, which can lead to a strong, lean and efficient business.
Disadvantages of Bootstrapping
- No investment capital may stunt your growth potential; restricting your visibility, marketing, and what you can do to serve your customers.
- For several industries such as manufacturers or importers, it’s often just not a feasible solution.
- Since you are using your own capital, you incur a substantial financial risk if the business fails and lose everything.
- Venture capitalists and investors are usually very well connected, so while forgoing outside investment, you may miss out on valuable networking connections and expert advice and wisdom.
Friends and Family
Suitable for seed-stage companies.
Raising capital through those who are close to you. This capital can be a gift, a loan or an equity investment.
Advantages of Friends and Family
- Likely to be the best opportunity to secure enough capital to get your business off the ground. As your business might be so early-stage there is no proof it will take off, beyond the idea itself, you might be the only asset for the business, and who better to buy into you as a person than your nearest and dearest.
- If the money is a gift, you don’t need to make any repayments.
- If it is a loan, they are more likely to agree to low rates of interest (if any), and a longer repayment period.
Disadvantages of Friends and Family
- Risk of placing a strain on your relationships.
- A personal relationship to you can affect judgement, and there’s a risk your friends and family may offer more than they can afford to lose.
Business and Startup Grants
Best suited to early-stage startups, but also suitable throughout a company’s lifetime.
Many SMEs are disenchanted by grants due to their infamous reputation of arduous applications and the highfalutin language that surround them; making it difficult to understand if your business is a good fit or not. Nevertheless, like the age-old saying, beauty is pain, and there is a considerable amount of merit in seeking out grants, both domestic and international.
Within the UK each year, there are over £12bn in grant interventions on offer. Grants tend to be skewed towards anything that creates jobs, such as industrial sectors, or improvements to certain areas or regions. So, if your project or business ticks any of those boxes, then it is worth checking what is on offer.
Advantages of Grants
- Money granted doesn’t need to be repaid.
- Public endorsement from a potentially well-known scheme operator, such as a Government body or sizeable corporate establishment, which can be utilised as a promotional aid.
- Money attracts money – once you have been awarded one grant, you are more likely to gain others as you are identifiable as a reliable candidate.
Disadvantages of Grants
- Every grant scheme works differently, requiring you to carefully comb through the varying entry requirements for each programme to check your eligibility, which can be very time-consuming.
- Different grant schemes may be intended to finance specific features of your company, so it is essential to ensure that your goals align with a scheme’s motivation. If they do align, grant schemes usually set restrictions on how much money they will provide, which may not meet your requirements, and your company pays out the rest.
- This type of funding is extremely competitive.
- Grants come with strings attached, which means that you must stick to the original plan laid out during the successful grant application.
How to Get Business Grants
If your business is entering a new market or region, the first thing you should do is check with the local or national Government about what grants are on offer for bringing your business to that area. You’ll be pleasantly surprised at how many countries and local Governments have offers on cheap office space, tax breaks, and other monetary incentives.
So, for UK based businesses, it might be worth taking a look at the Government’s Finance and Support for your Business site, and researching the options that are currently available. Also, some universities provide grants that are usually designed to help early-stage startups or to fund research. However, note that grants often involve significant application administration and time to secure.
R&D Tax Credits
Only suited to UK SMEs with less than 500 staff, a turnover of under €100m, or a balance sheet total under €86m, and whose projects “advances overall knowledge or capability in a field of science or technology, and projects and activities that help resolve scientific or technological uncertainties” (Gov.uk).
For eligible startups, R&D tax credits can reduce your tax bill, or increase taxable losses. The SME scheme has a rate of R&D expenditure tax relief as high as 230%.
As a business, you can claim 20-30% back on any research and development investment you have made into your business, so investments into new technologies or processes tick this box. The claim comes back as cash into the company, so it is something business owners should be looking at each year. So, if you’re spending upwards of £100k each year on new technology, that is potentially £30k cash you can get back into your business.
Advantages of R&D Tax Credits
- A successful R&D claim can make a substantial make-or-break cash difference to a developing startup.
- Loss-making companies can also file tax relief claims.
- No repayment of money, unlike other funding options such as loans.
- You don’t need to give up equity in your company, and you maintain complete control of your startup.
Disadvantages of R&D Tax Credits
- Rather than up-front funding, it is a retrospective tax incentive that you claim after beginning R&D.
- Depending on whether you have applied to certain types of grants previously, and the wording of those agreements, this can sheer tens of thousands of pounds off an R&D tax credit claim, or render you ineligible entirely. This is due to complications arising from EU rules around state aid competition, to stop companies gaining an unfair advantage within the single market.
- The necessity to maintain meticulous and comprehensive records for the HMRC (to avoid chances of error and time it takes for claim approval) can be time-intensive.
Finding R&D Tax Credits
Discover more about Government R&D Tax Credits directly from their website here.
To help you navigate your claim, you can get in touch with one of Seedrs’ partners, Swoop Funding, where they have two providers who have R&D cash advance facilities in place where you can get a short-term unsecured loan against your R&D tax claim. So, instead of waiting for your claim to process, you can get up to 90% of the claim into your account straight away.
Individuals contribute money to projects in exchange for a reward or product; usually, the size of the reward is a reflection the sum provided. Rewards can vary from a thank you card to a produced version of the crowdfunded project.
Advantages of Rewards-based Crowdfunding
- There are fewer legal complexities than other types of crowdfunding, such as debt and equity.
- Potential loyal future user base from individuals backing your project, who can promote your project within their circles and impart valuable ongoing feedback. An engaged network of supporters who have gained rewards through your campaign will be eager to be involved next time.
- Increased exposure to a broad online audience.
- A campaign results in a rich market research resource as you develop products, concepts and strategies.
- Negative cash to cash – you receive money before you deliver your rewards, reducing risk.
Disadvantages of Rewards-based Crowdfunding
- When you have raised the desired capital, you have to deliver the rewards you promised your supporters.
- Not suitable for non-consumer projects and products.
Finding Rewards-based Crowdfunding
Two well-known rewards-based crowdfunding sites for startups include Kickstarter and IndieGoGo.
Kickstarter is best suited to creative projects where the funds raised are used to make something that is shareable – e.g., music album. The platform fee is 5%, and the processing fee is 3% to 5%. However, fixed funding restricts access funds until you reach your target.
Indiegogo offers flexible funding (where you get to keep all of the money you raise, regardless of whether you met your target) and fixed funding. The platform fee is 5%, and the processing fee is 3% plus $0.30 per transaction.
Suitable for: raising money for a charitable project with no financial or material return.
Individuals donate money to fulfil a larger funding objective of a charitable project or cause, for no financial or material return.
The business model for donation-based crowdfunding is composed virtually identically to rewards-based crowdfunding, with one important exception, the altruistic consideration.
Advantages of Donation-based Crowdfunding
- Increased exposure to a broad online audience, potentially motivating new supporters who would not have donated otherwise.
- Charities benefit from reclaiming Gift Aid from the Government on all donations from UK taxpayers, which is worth an extra 25% on every donation.
- Crowdfunding for charitable causes provides donors with more transparency around where their donations and investments will go.
- A big motivator for giving to charitable causes is knowing exactly where your money is going, with a real aim and impact, e.g. raise £50k for disease treatment. Crowdfunding is perfectly placed to capitalise on this motivator and advertise precisely where donations are going to.
- The crowdfunding model results in improved marketing and raising public awareness for the cause.
Disadvantages of Donation-based Crowdfunding
- Since crowdfunding focuses on ad-hoc donations, there is a chance that it could minimise the number of people signing up to subscriptions and repeat monthly donations to charities.
- The nature of crowdfunding for charitable projects or events poses a threat of placing too much weight on projects with a short-term visible impact, lacking lasting social value. This can make it far more difficult for businesses to sufficiently support and advance the broad-based and continuing efforts they pursue if it presented as fragmented problems subject to people’s passing whims.
- There is a risk that donation-based crowdfunding might replace Government funding as it encourages public sector funders to retract from funding services that should be paid for by taxpayers.
Finding Donation-based Crowdfunding
JustGiving is one of the UK’s most popular platforms to raise funds for personal causes, a person in need, clubs, schools and communities. Other platforms include Virgin Money Giving and GoFundMe.
Finding the best form of financing for your startup can have a profound and lasting influence on how your business runs, and it will likely change over time, as you grow. Plenty of companies make use of combining the above funding options with equity financing, according to what they need at the time. To find out more about equity financing, take a look at our guide: Equity-Based Financing Options for Startups.
This post was contributed to by Ciaran Burke, COO & Co-Founder, Swoop Funding. Swoop simplifies and speeds-up access to loans, grants and equity funding for businesses in the UK and Ireland.