Funding your business

There are lots of different types of funding available for your new business. The type of funding most suitable will depend on factors such as the amount, your business structure, how long you need the funding for and many other factors.

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Loans

The most simple type of funding is a loan. A loan is credit, usually in the form of cash, that you borrow and repay over an agreed length of time. Loans can be obtained from Banks, community development finance institutions , other businesses and even friends and family. The amount of interest you will have to repay will depend on how much you have borrowed, how long the repayment period is, whether the loan is secured, and other factors such as the Bank of England base rate . The interest rate may be fixed or variable. Funds from a loan are generally suitable for financing a start-up or paying for assets. Loans can be tied to the lifetime of the equipment or other assets for which you’re borrowing the money . Loans are not payable on demand and you won’t have to give away any equity in your business or share any profits with the lender.
 

Funding your business

Bank loans

Bank business loans will usually be individually priced and have negotiable terms and conditions. To apply for a loan, you will need to prepare a loan proposal, which covers the figures of your business, how much you would like to borrow and how you will repay the loan.

Banks will also want information about your business, such as the structure and size in order to assess your risk value. It is a good idea to prepare a business plan and include financial projections and accounts. Banks are more willing to lend more to a company which has assets which can be used as collateral.

Bank interest rates can be fixed or variable. Business loans can be offered for far longer terms than personal loans. This might mean lower repayments but ultimately more interest to pay over the term.

Family loans

A simple way to obtain a loan is from friends or family. They are more likely to trust you and offer a lower interest rate than a financial institution. Make sure to formalise your agreement using a promissory note.

Peer-to-peer loans

There are companies such Funding Circle, which facilitate lending between private lenders, (often multiple lenders at the same time). This is also known as peer-to-peer lending. The repayment terms can be more generous and flexible than those of a bank.

Micro-loans

A micro loan(also known as a small business loan) is a small (usually for an amount between £5,000 to £25,000) short-term loan with a low interest rate. This can be used together with other types of funding. Certain banks offer these types of loans

Business to business loans

A parent company or related business may be willing to loan another business funds. Make sure to record this transaction securely using a loan agreement.

Investment finance

Investment finance or equity finance involves selling shares to an investor or investors. This investor will take a share of the profits and losses your company makes.

Angel investors

Angel investors provide investment in return for equity in your company. Angel investors are often entrepreneurs themselves and can help you to grow your business with their expert knowledge and contacts. Funds will not have to be repaid and you share the burden of risks with another person(s). However using an angel investor does mean giving away a share of your business and mean others will be involved in decision making. Your business will have to be set up as a limited company in order to sell shares to an angel investor.

Venture capital firms

VC funding is best suited for companies with the potential for rapid growth and high turnover. Shareholders must be willing to give up equity and some control, in return for investment, expertise and contacts. A VC firm will aim to exit a business having made a substantial return on their investment. Venture capital firms are funded by institutional investors such as insurance companies and pension funds. In order to secure investment you will have to appoint advisors to make contact and arrange for you to pitch for investment. Make sure you have a solid business plan, know your figures, and know why you want the investment of the particular firm you are pitching to. Again your business will have to be set up as a limited company in order to sell shares to a venture capital firm.

Crowdfunding

Crowdfunding involves lots of people investing, lending or contributing to your business usually via an online platform, to reach a certain target. Two examples of crowdfunding platforms are Kickstarter and Indiegogo. Crowdfunding is a simple and accessible way for others to invest in your business. Creating a crowdfunding campaign on an online platform also allows you to market your idea, product or business. Depending on how popular it is, you can raise funding relatively quickly. However you should protect your idea and business name before you publish both in the public domain. You can either offer rewards (free products etc) in return for investment or equity in your company.

Grants

A grant is an amount of money given to an individual or business for a specific project or purpose. You can apply for a grant from the UK government, the European Union, local councils and charities. Discover if you are eligible for certain grants using the Business finance support finder.

Overdrafts

An overdraft is a credit facility you agree with your bank. It allows you to temporarily spend more than you have in your account to cover short-term financing needs. Most major banks charge interest only on the amount you overdraw, and many offer tailored packages for young businesses. Rates of interest on bank overdrafts are usually charged above base rates, and in most cases the overdraft amount is repayable on demand. You may have to pay a fee to use the facility.

Invoice financing

Invoice finance is a short-term finance option where a third party financier ‘buys your unpaid invoices for a fee. There are two types of invoice financing in the UK:

Factoring

A factor takes control of your invoices and sales ledger by collecting money owed to you by customers. To engage a factor you sell an unpaid invoice to them at a discounted rate (eg you are owed £40,000, the factor buys it for £34,000). They collect £40,000 from your customer and pay you the remaining £6,000 when they receive the money. You pay the factor interest and any fees you owe. Factoring allows you to have access to cash quickly but customers will pay the factor rather than you, which could damage customer relations, and reduces your profits as you have to pay the factoring firm. You also have to compensate the factoring firm for outstanding invoices before you can sever your contract with them.

Invoice discounting

Invoice financiers lend money against your unpaid invoices - usually an agreed percentage of their total value. You will have to pay them a fee. As invoices are paid directly to the invoice financier, your debt to them is reduced meaning you can then borrow more money on new invoices up to the percentage you agreed with the invoice financier.

Finally, find out more about funding your business by using the business finance and support finder and by searching for finance schemes in your area.

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