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How to get funding to start a business

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From The Apprentice to Dragons’ Den, we’ve all seen TV shows where would-be entrepreneurs pitch for funding to start a small business (or scale a company later down the line).

While these shows make for great entertainment, they can make the idea of getting investment seem rather scary.

In the real world, there are several ways to get funding to start a business in the UK – and you won’t normally get shouted at by leaders of industry in the process.

Funding is a real concern for many people who are interested in entrepreneurship.

In a recent Sage survey, more than half of respondents said financial constraints were the main barrier to them launching their own company.

The good news is there’s plenty of financial help available for starting a business.

Here’s what you need to know about startup funding:

Why get financing to start a business?

How to get money to start a business

What to provide when applying for funding

More than just finances

Dreaming of bossing your own business? Take our quiz to see how ready you are to take the plunge

There are several reasons that you might want to seek out financing to start a business:

  • Equipment costs – such as computers, vehicles, tools or machinery
  • Premises costs – renting an office, workshop or factory space
  • Staff – if your business needs staff so it can run effectively, you might need help to pay their salaries

It’s always worth asking if you really need external financing.

Research shows that a quarter of all businesses in the UK launch with less than £1,000 and more than 80% of UK startups are entirely self-funded.

So, it might be easier than you think to start a business without borrowing money.

Of course, in many industries, it just wouldn’t be possible to launch without funding. This is especially true in sectors where you need to invest before you can start making a return.

Technology companies, manufacturing firms and retail businesses almost always need external investment to get going.

If you don’t have your own personal savings to invest in financing a small business startup, the following methods could help:

Family and friends

Getting a loan from friends or family is one of the oldest ways of financing a startup business.

Your relatives or acquaintances may either lend you the money until you start making a profit, or they might ask for a share in your company.

The benefit of turning to friends and family is that they may lend you the money for nothing (or at very reasonable rates of interest).

But, of course, if things go wrong with your business and you can’t repay the loan, this could affect your personal relationships.

Banks

Banks are another traditional way of seeking funding to start a small business. You approach the bank manager and ask for a loan, then pay interest on it.

However, since the 2008 financial crisis, startups and small and medium-sized enterprises (SMEs) have found it harder to access credit from banks.

Unless you have a large amount of collateral to back the loan up (such as property), it may be difficult to get money in this way.

UK government startup loans

The UK government’s Start Up Loan scheme can lend between £500 and £25,000 to small businesses with an annual interest rate of 6%. The loans must be repaid within five years.

These government-backed loans do come with relatively strict eligibility criteria, though.

You must be 18 or over, be a UK resident and provide evidence that you couldn’t raise funding through other avenues.

Grants

Grants are a way of getting free money to start a small business.

These sums are made available through a variety of schemes from central government, regional governments, universities, and major institutions (such as museums, professional membership bodies or cultural funds).

Business grants are normally awarded to startups on a very specific basis, normally to solve certain problems.

For example, if a local council was looking to regenerate its manufacturing sector, it might provide grants to manufacturing companies to encourage more employment in their town.

Grants often come with strings attached and require a long application process. But if you can prove that you meet the requirements, this can be a great way of accessing capital.

You can find listings of new grants at the following websites:

Crowdfunding

Crowdfunding is a relatively new way to find funding to start a business.

There are various crowdfunding websites where you create a page describing what your business will do and how much money you are looking for. People on the website may then decide to provide you with small sums of money.

There are a few different kinds of crowdfunding:

  • Donation: People give you money because they like the idea behind your business with no expectation of anything in return.
  • Equity: Investors will ask for a share of your business in return for their investment. They effectively become your shareholders and you’ll have to pay out dividends to them in future if the business is a success.
  • Debt: With this kind of crowdfunding, people who lend you money will expect it back with interest in an agreed time frame.

Crowdfunding is especially popular for unusual or interesting startups that might struggle to access funding from other sources.

Your ability to raise funds relies on how well you can pitch and promote your idea on these websites.

FundingCircle and Kickstarter are some of the most popular sites for crowdfunding to start a business.

Investment

Getting investors on board with your idea is another potential way of finding capital to start a business.

The investor will normally provide a large amount of money, which you can use to grow the company. Investors will expect equity in the business and may insist on being involved in decision making.

There are a couple of kinds of investment:

  • Angel investment: A wealthy individual provides equity finance to your business. Angel investors often get involved right from the beginning of the company’s journey. The UK Business Angels Association is a good place to start.
  • Venture capital: There are various large venture capital funds. They typically invest in startups that have already got a couple of years under their belt, but they may occasionally invest in promising new businesses. Try the British Private Equity & Venture Capital Association to begin.

It can be challenging to find an investor who will provide the funds that will help you start a business and you may have to hand over a certain amount of control to them.

That said, they’re normally very experienced running companies and can provide advice and guidance.

If you’ve found a potential source of funding for your business, make sure you read the requirements of the lender or investor in detail. They normally ask for very specific information on your application.

When you’re applying to finance a small business startup, you will, at a minimum, need to provide:

  • A business plan, which explains what the business is and how you expect to grow it
  • Financial projections, which show (realistically) how you will generate income and reach break-even
  • Information about your professional and educational background
  • Details about your personal finances including your savings, debts and if you’ve ever filed for bankruptcy.

Whether or not you decide to get funding to start a business, being an entrepreneur requires more than just startup capital.

You’ll also need to consider the administrative side of running a company and think about your mindset too.

And that’s where our business readiness quiz helps. It takes just a couple of minutes to complete and will give you personalised guidance about what you need to do to get ready to launch and boss your business.

Are you ready to be your own boss?

Dreaming of bossing your own business? Take our quiz to see how ready you are to take the plunge.

Take the quiz

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