Start-Up Finance Guide
- Introduction – why proper business start-up finance is essential 101
Lack of proper business finance is one of the most common reasons for eight out of ten businesses failing during their first two years. Around a third of businesses say they didn’t have enough finance and almost another 10% say they couldn’t access business finance.
Starting a new business is a big step for anyone. However, many believe that they can succeed with little or no funding. It’s important to be realistic about the costs and potential returns from your new business.
The amount of business finance you need for your new venture will depend on the market sector you’re entering and the time it will take for you to create and successfully sell your product or service.
Your business plan is the best place to put all the figures together and to set a realistic timescale and budget based on:
- forecasts for sales and costs (on-going costs including rent, staff and stock)
- projected cash position each month
- one-off costs and outlay for things like equipment (computers, tools and office furniture for example), which are often underestimated.
Be realistic in your calculations. If sales are lower than your projections or payments are delayed your costs will increase, so you’ll need to include contingency funds to allow you to keep going.
When will you need funding?
Once you have established a realistic level of finance for your start-up business, you’ll need to think about when you’ll need it. For example, do you need it all at once, or in regular instalments? Can you obtain the finance you need from different sources at different times? Answers to these questions will affect how much you need to secure and the type of financing that will suit you best.
Many start-up businesses will spend more than they bring in for the first two or three years, so you need to be prepared for this. Because it takes time to establish a strong customer base you might need to consider ongoing finance, even after you pass the break-even point.
What’s your financial backup plan?
Of course, your start-up business could be a success from day one, but without contingency funds, you could still struggle to keep your success on track. For example, if your invoices are paid after 60 or 90 days, instead of 30, will you have enough to pay staff and carry on trading? If you’re launching a new product, how will you continue if manufacturing is delayed?
Here we review finance options available for business start-ups, starting with some of the simplest.
- Business start-up finance – overview of options
Self-funding – First-time entrepreneurs often have trouble finding business finance.
Lenders will often want you to demonstrate a proven track record of business success and to provide a comprehensive business plan.
Your self-funding options could include:
- investing your own savings
- selling your assets
- using a credit card
- support from your family and friends.
This can be faster and have fewer restrictions on how the money is used. Friends and family are also more likely to be flexible about interest rates and when the funding must be repaid.
Crowdfunding – A newer way of funding your start-up business, crowdfunding is becoming more popular.
You can describe your project on crowdfunding sites like Kickstarter, which is designed for creative projects and inventions, or indiegogo, where you can fund almost anything and set up not-for-profit projects too. If you are happy to consider selling a stake in your company, then Crowdcube or Seedrs could be of interest. If you want a crowd-powered loan, RateSetter could be worth consideration.
You will need to describe your goals, plans for making a profit, how much funding is needed and what it’s for. In some cases, you will have to reach your financial goal to access the funding, although some sites let you use any funding pledged.
The crowd funders (individuals or organisations) make online pledges for projects that interest them or that they believe will succeed. They can invest or donate to your project in return for potential profits or rewards.
Investors will normally receive a stake in your business, often as shares. Alternatively, the money from individuals or business can be a loan at an agreed interest rate – this is known as peer-to-peer (P2P) or peer to business (P2B) lending.
Peer to peer lending is a type of finance between individuals, or ‘peers’, without a traditional financial institution such as a bank or building society being involved. Someone will make a donation to your project although they will normally expect something in return.
Rewards-based crowdfunding or seed funding is normally for very early-stage businesses looking to raise anything from £500 to £50,000, although some businesses have raised up to £1million.
Equity-based crowdfunding generally starts from £50,000 up to £4million, with businesses that already have some performance information to share.
Business angels – People who have cash available and are interested in new start-up businesses are sometimes called ‘business angels’. They often work together in groups or clubs to review proposals before making their investment decisions. Many are successful business owners in their own right and can also offer mentoring or advice.
The UK Business Angel Association (UKBAA) represents and connects all those involved in the angel investment market. UKBAA says that, in general, angels invest between £10,000 and £500,000 in a single business. A total of £1.5 billion is invested in the UK by business angels every year.
In return for providing finance, angels are looking for a high return on their investment, usually expecting 2.5 times their original investment.
Angels might not require a large amount of equity in your business, but they’ll usually expect to have a say in important business decisions.
Since angels are investing their own money, they are often very risk-averse. They could spend three to six months completing their due diligence process before finally deciding whether they will invest in your project.
Venture capital – Start-up venture capital comes from professionally managed funds that invest in businesses with significant potential. The average size of venture capital funds in the UK is £118million. This is one third smaller than in the USA
This is not a long-term business finance option and will usually be intended to take your business to a predetermined size and market position. When your business reaches this milestone it will be sold to a larger business or shares will be sold as part of an initial public offering (IPO), so this will need to be part of your plan. Venture capital investors will require equity in your business in return for their investment.
Early stage investment funds specialise in start-ups that are developing ideas, prototyping, creating minimum viable products (MVPs), products that are very new to the market and those that are showing rapid growth. They often have networks of angel investors that co-invest. They might invest between £25,000 and £1million, depending on the type of business and the size of the fund.
Larger funds might invest millions in established businesses with a good track record of sales and growth.
However, venture capital funds expect a lot. They will be looking for a return between 38% and 48% a year and will also expect significant equity in your business. If you are asked for 50% or more of equity, then you are effectively handing over control of your business to them.
Although they are generally willing to take more risks than angel investors, venture capital funds are also likely to take a very long time to make an investment decision.
The British Private Equity & Venture Capital Association (BVCA) can offer advice on venture capital for your business.
Corporate investments – Similar to angel investors, corporate investment banks might choose to invest in new businesses. They can often invest more than individuals or venture capital funds.
For example, a UK-based start-up, Improbable, has developed large-scale virtual reality technology with the help of £389 million finance raised over four fundraising rounds. The business now has over 300 employees in the UK, USA and China.
Business incubators and accelerators – Business incubator and accelerator programmes exist in most major cities. Incubators support and protect new businesses and provide access to training and networks. Accelerators also provide this type of support but will also help a business to take the next major step in their development.
The programmes are usually short (four to six months) and require you to work with mentors, investors and other start-up businesses.
Both accelerators and incubators support young firms through the early stages of growth. They aim to help you avoid the mistakes others might have made, saving time and money and improving your likelihood of success.
Because of these shared goals, their activities often overlap.
Start-up accelerators have been introduced more recently than business incubators and there are some significant differences in their business models, sources of funding, and the services they provide.
There are around 200 incubators and 160 accelerators in the UK. While all incubators provide businesses with office or work space, accelerator programmes place more emphasis on direct funding, with the majority offering some financial support to business start-ups.
Most business accelerators and incubators cover all industry sectors, although some focus on digital technology and science-based areas such as health and life sciences.
More than half of accelerators are currently based in London, while incubators are spread relatively evenly throughout the UK. Scotland, Wales and Northern Ireland have greater concentrations of both incubators and accelerators than England, relative to the number of new businesses.
Accelerators tend to rely on corporate funding while incubators tend to be funded by the public sector or universities.
Competitions – There is a range of UK and internationally-based business awards and competitions that provide funding, support, and publicity to start-ups, entrepreneurs and new business ventures.
They provide opportunities for entrepreneurs to compete with other business ideas by building a product or preparing a business plan. They can allow you to test your idea or concept and can provide crucial resources and contacts to help you to grow.
Your project will need to stand out and your business plan should be comprehensive enough to convince anyone that your idea is worth the investment.
Start-up competitions include the Shell Livewire award that offers monthly prizes of £1,000 to four businesses, some prizes of more than £10,000, right up to the Lloyds National Business Awards that support small and medium businesses with prizes up to £50,000.
Loans – A start-up business loan from a bank or building society can be hard to obtain, although some organisations specialise in start-up finance. However, over 70% of small business loans are approved.
The British Business Bank (BBB) has extended its existing partnership with the loans platform Funding Circle and has committed up to £150 million in new lending for UK small businesses.
How to qualify for a business start-up loan
Secured and unsecured small business loans are the two main options. Secured loans use your company’s assets as security. If you’re unable to repay your loan these assets can be repossessed. Because this provides more security for the lenders the interest rates are often lower than other types of loans.
For an unsecured loan, you will probably need to give a personal guarantee based on your credit rating. If you’re unable to repay the loan your personal assets could be at risk.
Types of loans for small businesses
Term loans are borrowed for a fixed amount at a certain interest rate for an agreed period.
Banks might also loan up to 85 to 90% the value of outstanding invoices that can be paid back once you have received the payments. This is called factoring or invoice financing and it can be a good option for companies that often have outstanding invoices such as retail businesses.
Non-banking financial companies (NBFCs) also provide micro-loans for small businesses. They don’t have the same legal requirements as a bank, so they are increasingly popular for businesses with small financial requirements or credit ratings that don’t meet a bank’s expectations.
These providers can offer a small amount of cash to support initial business start-up costs, usually in the range of £1,000 to £10,000, for computer equipment and rent on business premises, for example.
Asset finance – Hire purchase and lease financing for vehicles and machinery allow tools and equipment to be bought without a large capital outlay.
Commercial asset finance for start-ups and small businesses allows you to use available cash for day-to-day operations, paying staff or to take on a new contract.
Along with invoice factoring these options are worth considering to help manage your cashflow.
Business start-up programmes and grants – To boost innovation the government and other organisations provide business funding, including business start-up grants.
To apply for a business start-up grant you’ll need to meet the eligibility criteria and have a convincing business plan for your loan to be approved.
A good place to look for government-related grants is your Local Enterprise Partnership (LEP), whose main goal is the growth of businesses. Each LEP covers one or more counties and offers a variety of grants for their area. There are a number of grant funding websites.
If your business start-up involves research and innovative technology, you can find information at InnovateUK.
Many grants are match funded. To be eligible for a grant your business must be able to raise finance to provide 10% to 70% of the overall cost of the project.
Here’s an overview of some of the funding opportunities available for start-up businesses.
Small business start-up loans and grants
|Tax relief for business start-ups||Seed Enterprise Investment Scheme (SEIS) |
|Investors can reduce their capital risk by claiming eligible investment against their tax bill.|
|New businesses||Heritage Lottery Fund||Grants for non-profit organisations or entrepreneurs starting a new business.|
|Childcare||Childcare Business Grants Scheme|
|£500 to £1000 grants are available for early years childcare and disability care providers at home and childminder agencies.|
|Care for the elderly||Transform Ageing||Businesses that focus on innovation including developing or providing solutions for the elderly.|
|Young entrepreneurs||The Prince’s Trust Grants||Grants of up to £1500 and mentors for young people to help them start their own business.|
|Apprenticeships||Apprenticeships grants||Funding for employers training 16- to 18-year-olds.|
|Regional||Grant for Business Investment (GBI)||Grants from Regional Development Agencies (RDAs) to help businesses expand and diversify.|
|Competition||FedEx Small Business Grant||Grants of £20,000 and £5,000 to the winner and two runners up.|
|Back to employment||New Enterprise Allowance||A grant in the form of a weekly allowance over a 26-week period.|
|Access||The Access to Work Fund||Financial support for disabled people who have a paid job, are about to return to a paid position or start a business.|
|General/International||The British Council||Grants on a rolling basis through a range of funding programmes.|
|New products and services|
|Research||Small Business Research Initiative (SBRI)||Up to £100,000 for innovative ideas that can enhance public services or solve a specific public-sector problem.|
|Research||Feasibility Studies Grants|
|Funding for testing new business ideas including new product development, new process or business model development and service development.|
|Research and development||Collaborative Grants Scheme||Grant funding of up to £5million to fund or accelerate research and development programmes in the UK developing new products, services or processes.|
|Development costs||The research and development tax credits scheme||Up to 32% of your development costs can be claimed back in cash each year.|
|Innovation||Innovation vouchers||Up to £5000 for expert advice to help grow your business.|
|Innovation||Launchpad Grant Funding||Competitions for up to £100,000 of match-funding for companies with viable plans for innovative and exciting business ideas.|
|Innovation||Catalyst Grant Programme||Fund of up to £10million for initiatives creating new knowledge or developing ground-breaking and innovative products, services or processes.|
|Innovation||Knowledge Transfer Partnerships (KTP)|
|Grants for businesses employing recent graduates working on innovation projects. Graduates must be supervised by a research partner.|
|Innovation||Patent Box||Reducing Corporate Tax by up to 50% for businesses with patentable products.|
|Scientific breakthrough||Smart Grants Scheme||Up to £250,000 for start-ups researching and creating significant technological or scientific breakthroughs.|
|Scientific solutions||CRACK IT||Grants supporting partnerships between academic organisations and small businesses solving business and scientific challenges.|
|Visual arts, dance, theatre, literature, music||Grants for the Arts||Grants of up to £100,000 for initiatives furthering art and culture, creating a long-term impact and accessible to anyone|
|Green resources||Plug-in Van Grant||Grants to haulage and transport businesses using electric vehicles.|
|Energy, recycling and waste||The Environment Now||Grants to 17- to 24-year-olds with innovative ways to use digital technology to provide solutions to environmental issues.|
|Countryside||The Prince’s Countryside Fund||Grants for businesses or organisations seeking to increase the potential return and longevity of family-run farm businesses, or to sustain and grow rural economies.|
|Forestry||Forestry Commission Grants||Grants designed to expand, protect and promote the sustainable management of woodlands.|
|Energy||The Energy Entrepreneurs Fund||Grants to support cutting-edge technologies, processes and products in power production, electricity and heat storage and energy efficiency.|
|Energy||The Carbon Trust Green Business Fund||Grants to cover the capital costs for medium and small businesses buying energy reducing or saving equipment.|
There are also almost 200 regional and local finance initiatives across the UK that could help with finance for start-up businesses.
- Business start-up finance options – pros and cons
|Self-funding||When you have used your own money to start you are clearly committed to your business. At a later stage, investors will probably consider this as a positive point.|
You can get underway quickly and retain full control of your business.
You will also be free to make all the decisions. Future investors, partners, and employees will appreciate your belief in your business.
|Self-funding or bootstrapping is only suitable if your initial financial needs are small. For some businesses significant funding is needed from day-one.|
If you are self-funding, you will need to stretch all of your resources as far as possible.
Unless you are very wealthy, personal investments are usually limited and may be not enough to start your business.
Business failure will put your savings and the money of your circle of family and friends at risk.
|Crowdfunding||Crowdfunding can generate interest and help with your marketing as well as providing financing.|
It will also provide valuable information if you are not sure that there will be any demand for your product or service.
Crowdfunding is a way to avoid professional investors and brokers. It might attract venture-capital investment later on.
As with self-funding, you will also keep control of your company. Even if you have to give some equity to your funders, it will only be a small part of your business.
|You won’t be able guarantee a return on investment for your funders and that might mean they are less willing to support you.|
To succeed in crowdfunding you need to create a compelling story, build your brand, produce a video, and market it properly before you generate any interest.
Less than 40% of the projects on Kickstarter successfully gained funding.
|Business angels||You will often receive advice and mentoring from your business angel.|
Angels are usually passionate about business and are often experienced entrepreneurs themselves. As sophisticated investors they can provide you with support and guidance.
Angels often have a network of key people who can also help you.
|Your investors will often expect to own some of the equity in your business – up to 30%.|
You will be expected to have a close relationship with your business angel. They will usually want to get involved and you might feel they interfere.
Alternatively, your angel might become disengaged and unwilling to support you if they lose interest or don’t have enough experience.
|Venture capital||You will often benefit from expertise, mentorship and advice about your business.|
Your investors will thoroughly investigate the potential of your business from the sustainability and scalability point of view. This will give you confidence that you have a good chance of success.
Venture capital funds are often larger than those available from angels. They will also have networks, mentors, and resources to help your business succeed.
|Venture capital funds expect to recover their investment within three to five years.|
If you have a product that will take longer to get to market, then venture-capital investors may not be interested in you.
It’s a very competitive industry, which can make it difficult to convince funds to invest in your business. They will normally be interested in fast-growing start-up businesses in lower-risk sectors. You will have to put in a lot of work to obtain the funding, without any guarantee of success.
If you are successful, you will be expected to give more equity in your business and have less control to maximise their returns. You won’t be able to make big decisions alone.
|Corporate investment||Corporate investors will have larger funds available and take a very measured and structured approach to their investments.|
Some corporate bodies will offer strategic partnerships and support from their own business.
|Some corporate investors will use this option to take a relatively low-risk approach to innovation that can benefit their own business. This can bring a higher level of control over the development of your business and might narrow your options to collaborate with their competitors, for example|
|Competitions||To succeed you will need to create a comprehensive and convincing business plan. This will be a good foundation for your business.|
Your entry will help to build you credibility, practice delivering a compelling presentation and could provide you with some valuable business connections.
Winning competitions can result in valuable media coverage in industry sector interest.
|Some competition submissions require a great deal of work, which might be too much of a burden.|
Does the time you will invest have a high enough probability of a return to make it worthwhile?
Competitions could also distract you from the important work of running your business.
|Loans||Terms and conditions are clearly defined, your interest is usually fixed, and you have access to resources such as a network of mentors and key people.|
As a business owner will have to do research, define your unique selling proposition (USP), undertake due diligence, and create a thorough business plan to access a start-up loan. This discipline can only be good for your prospects of success.
|Many business start-ups don’t have the necessary assets to obtain an unsecured loan with lower interest rates.|
As new business you will probably be unable to provide the market validation and proof of concept information that lenders will require.
You might also be limited in how and where you can spend the loan, as you will be required to provide an agreed, detailed analysis of expenditures.
|Asset finance||Paying for assets with cash can put a strain on the working capital of your business. It can also reduce the future opportunities a business has to raise funds for growth.|
Using alternative financial methods can allow you to acquire or rent business assets without using up valuable working capital.
Payments are normally paid monthly and at fixed rates, so they can be factored into your business plan.
It is less risky than an unsecured loan. If you are unable to make the payments you might lose the asset, but not your home.
|You won’t be able to claim capital allowances on leased assets if the lease period is less than 5 years (7 years in some cases).|
The overall cost will probably be higher than outright purchase, so you will have to consider the benefits of retaining more cash in your business.
Long-term contracts can be difficult to cancel.
|Start-up programmes and grants||You don’t have to pay grants back and you can also receive a lot of other ‘in kind’ support|
Securing a prestigious grant can also demonstrate the potential of our business to your clients and future investors, partners.
|Accessing these grants and programmes can be a lengthy process and you might not be eligible.|
Your start-up business will often have to match certain criteria to qualify. You might have to change your original plans to receive this support.