The idea of setting-up a business appeals to many people. But to turn the dream into reality takes money. And, if the business takes off, you’ll probably need financing to grow it. There’s a wealth of financing options available, but which is best for you, your business and your current situation? You may find you need to use more than one way to raise money for your business. Let’s take a look at the various options:
Bootstrapping – best very early on when there’s no or limited team costs
If you build your business without borrowing money or parting with equity, you’re ‘bootstrapping’. Instead, bootstrappers use their personal income and savings to support the business. They also focus on operating at the lowest cost they can. Some of the world’s largest companies started out as bootstrapped ventures.
Grants – best for early-stage, good throughout
If you’re developing a product or service, you may be eligible for a grant. It might be worth taking a look at the government’s Finance and Support for your Business site and perusing the options that are currently available. For a detailed list of grants available, broken down by region and industry, check out Nerd Wallet’s article here. Some universities also provide grants that are usually designed to help early-stage spin outs or to fund research. But, note that grants often involve a lot of hard work and time to secure
Debt financing – best for when you already have cash flow
If you need money and can demonstrate a reasonable cash flow, debt financing may be most appropriate. This can take the form of:
- Bank loans – These fall into two types. Unsecured business loans are typically taken out from a bank or building society. The amount they can provide and the interest you’re offered will depend on your personal credit rating and the creditworthiness of your business. Because this type of loan isn’t secured against your home or business, the amount you could borrow will probably be relatively small. To borrow more, you may consider a secured business loan. A secured business loan can be secured against your home, stock you’re purchasing, and on the assets belonging to the business. Depending on the assets you can put up as security and your circumstances, you may be able to borrow substantial amounts.
- Government-backed start-up loans – If your business is just getting off the ground, it’s worth looking into government-backed schemes to find out if you’re eligible for any start-up loans. is a government-backed scheme that’s designed to help people start or grow a business in the UK. As well as a loan, you may be able to get free mentoring.
- Peer to peer lending (p2p)– The loan comes from private lenders and firms. This type of loan is carried out through an online platform. Some, such as Funding Circle, lend from £5,000 to £1 million. A more competitive interest rate on borrowing is usually offered than banks can provide. And, the funds are usually paid a lot faster than if you went through a bank. Once approved, they can generally be paid out within two weeks.
- Invoice financing – If you need money right now rather than in a few months when a large invoice is due to be paid, invoice financing may be appropriate. With invoice financing, a third party ‘buys’ your unpaid invoices from you and lends you money against their value. There are two types: factoring and invoice discounting. With factoring, the invoice financier (such as Market Invoice) collects the money owed to you by your customers. With invoice discounting, the invoice financier lends you money against the value of your unpaid invoices, but you collect the money from your customers as usual. You then use this money as it comes in towards repaying your loan. Best for well established companies that have a bit more financial certainty.
Reward-based crowdfunding – best for product-based and creative businesses
This can be likened to pre-ordering. As well as securing funds, you could also gain early brand ambassadors. You access the service through a platform, such as Kickstarter. People provide funds in return for receiving the finished product at a later date. Sometimes they receive a discount against future purchases or other rewards. This type of funding can help you to build up a lot of loyal supporters and raise a high amount of capital if it proves popular.
Equity funding – ideal for a range of businesses
With equity funding, you receive investment in exchange of giving away a percentage of your company. There are a few types to consider:
- Incubators and accelerators – best for very early stage
This type can provide both funding as well as valuable support. Some specialise in particular sectors, which can add extra value with tailored advice provided. You may be offered space with the accelerator, where you may get the advice of successful entrepreneurs. The aim is to fast-track your business for further growth and gain additional investment. You may be asked to give-up 6-8% of your business for around £15,000 to £20,000.
- Equity crowdfunding
Investors view business pitches via an online platform. The business decides the amount they need to raise and the amount of equity that they’re prepared to give up to secure it. The platform works on an ‘all or nothing’ basis, so no funds will be released unless the target is met. Typically, you’ll attract a large amount of investors and build your brand awareness because a raise may generate a lot of social media and press coverage.
- Angel Investors – best for early/mid stage
These are high-net-worth or sophisticated individuals looking to invest in a portfolio of other businesses. As well as helping to raise money for your business, they offer to share their expertise and contacts.
Venture capital– best for mid/later stage
At this stage, the business model will have been proven and the focus will be on looking to scale. So, a typically funding is £200,000 and upwards. VCs can manage investment from a wide range of investors, but may also be investing on behalf of pension funds. Be prepared for a high level of scrutiny. Also, VCs may demand a high level of involvement in your business to help drive growth and see a return.
Which route is right for you to raise money for your business?
It’s not easy to decide which option to go with to raise money for your business. You may end up going with a combination of the above, or go down a few routes as your business progresses. Everyone at Seedrs wishes you the best of luck – whichever way you go.