9 funding options for start-ups

Published · 4 min read

There are a number of business funding sources that come with set criteria, so before you look for sources of finance, ask yourself would you invest your own money in the start-up? If not then why should anyone else? I have meet too many start-ups that have a view that money is free and that other people and institutions should fund their ideas. The reality is that even financing is a competitive business with obligations to the investors or institutions that own or manage the funds.

Let’s look at the funding options available to fund the new venture and start your entrepreneurial journey.

  1. Crowdfunding and peer-to-peer lending:
    Investors lend small amounts via online platforms and follow the same principle of raising finance from a number of people who pool together. Sage, in partnership with one of the UK’s leading peer to peer platforms Funding Circle are working to help more UK businesses access the finance they need to grow. Crowd funding requires equity in return meaning you give shares in your company for upfront investment. Peer to peer lending offers a loan from ‘the crowd’. Make sure to also read our post on how to crowdfund.
  2. The Business Angels community
    It is very diverse in the UK, reflecting a range of models and approaches such as angel networks, small groups and syndicates; super angels; individual investors and new models like accelerators. The UK Business Angels Association represents and connects all those involved in the angel investment market.
  3. Venture capitalists and private equity
    It is finance provided in return for an equity stake in potentially high growth companies. Growth is delivered by working with the business’s management team to improve performance and strategic direction, making complimentary investments and driving operational improvements. The British Private Equity & Venture Capital Association can offer more advice on this subject.
  4. Small business grants
    This is a highly overlooked area that fits into one of three categories:
    – Government grants
    – European grants
    – Local grants
    Each scheme has its own set of criteria to determine whether a business is a worthy investment. There are a number of free and subscription websites that list available grants and by answering a few questions you can be directed to a shortlist of possibilities. Try www.j4bgrants.co.ukwww.grantfinder.co.uk or www.grantsonline.org.uk.
  5. UK and international business awards and competitions
    These provide funding, support, and press to startups, entrepreneurs and new business ventures. Awards are a great way to test your idea, grow your network and build your profile. The entrepreneur handbook offers more information on this subject.
  6. High Street banks
    They are the primary source of funding for startups financing debt. Alternative sources have sprung up in recent years as the perception has been that banks are not lending.
  7. Micro-loans
    Business Loan is an alternative responsible lending provider if the banks turn you down. Such lending providers can provide a small injection of cash to support initial startup costs – usually in the range of £1000- £10,000 used for computer equipment and rent on business premises, for example. Business owners will also often benefit from the provision of a mentor. Given these loans are unsecured, a mentor supports the company owner and provides accountability for the repayment of the loan.
  8. Asset finance
    Hire Purchase/Lease Financing for vehicles and machinery allows tools to be purchased without the need for a large capital outlay. The rest of the cash can be kept to run the business, pay staff or take on a new contract. This is a less likely option for most startup businesses, but one to be considered; along with Invoice factoring as a possible alternative to cash flow. One such invoice finance firm Marketinvoice have partnered with Sage and provide short term finance to businesses with revenues of over £100,000 by releasing cash tied up in their unpaid invoices. You can access funds on the same day you sign up.
  9. Friends and family
    The least bureaucratic funding source, however, these loans can be riddled with potential problems which may affect long-term relationships.

Due to a poor credit score, a lack of personal guarantees and a poor financial history, mainstream finance can be a struggle and a serious barrier for the disadvantaged. The business model or entrepreneur may be deemed a high risk due to a lack of history or assets.

A high proportion of applications are turned down by banks due to a lack of investment readiness. Understanding the requirements of lenders and being open to the range of finance options will enable startups to overcome financial hurdles.

Responsible lenders are thorough and forensic in their due diligence. However, alternative lending providers are becoming the envy of mainstream bank lenders due to their wider assessment criteria and measures.

  1. How viable is the business idea and plan?
    Investors and loan providers will assess the business idea and plans on the likelihood of profitability. An outline of the startup business plan presented with forecasts for sales and expenditure, showing conservative estimations of the monthly cash position will be required. Your accountant can help with this.
  2. Is there a match?
    What financial option best matches the needs of the business. Some funding organisations and investors favour specific business models, so do your research to see if a funder has a history of investing in a particular sector.
  3. Is the prospective entrepreneur really ready?
    People buy from people. Even in Dragons’ Den, the investors decide on the readiness of the entrepreneur first then the idea.

Following the global economic recession, ‘investment readiness’ is all the more essential. Research your funding sources thoroughly for credibility and to ensure it is the best solution for your business.

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