Guide: 11 Ways to Acquire Funding to Establish your Business Successfully
When you think of establishing a business, the first thing that strikes your mind is the availability of capital.
Or, in layman’s terms, money.
Not everyone who has ever thought about starting a business has the funds abundantly available in their bank accounts. So they opt for bank loans, crowdfunding, reaching out to business angels, venture capitalists, etcetera for funding their business.
Hence, there are many ways to acquire funds to grow or kick start a business.
In this article, you will learn about different types of resources available for capitalising on your business in the UK.
Table of Contents
Types of Funding
There are diverse types of funding opportunities available when it comes to business. A few of them are listed below.
- Loans
- Personal Funding
- Government Funding
- Crowdfunding
- Community and Social Schemes
- Grants
- Angel Investing
- Seed Funding
- Venture Capitalist
- Debt Funding
- Asset Financing
Let’s learn more about each type in detail to help you make an informed decision.
Loans
Taking out a loan is one of the most popular, common, and accessible ways to borrow money. You can use the loan for both personal and business reasons.
There are two types of loans:
Large Bank Loans
Larger bank loans are often worth more than £25,000 and can surpass £1 million. This type of loan might be beneficial if you want a substantial capital infusion for a growth, recruiting drive, or a large project.
However, SMEs may not be able to take advantage of these larger loans as the bank will demand security and assurances to approve the loan.
Bank loans for specialists
Many banks provide specialised loans to purchase equipment or automobiles. The advantage of going with one of these specialised loans is that you can be highly particular about the purpose of the loan and the exact amount you need, and why you need it.
Furthermore, in a financial scenario where a bank might be hesitant to lend funds to you, describing a set demand, cost, and financing time might help you make your application appear more credible.
As classic favourites, bank loans may seem like the perfect choice; however, they have several pros and cons.
Pros and Cons of Loans
Pros
Interest is tax-deductible
The interest on commercial bank loans is tax-deductible; that is, it will reduce your income, which will reduce the overall tax you have to pay.
Furthermore, especially with fixed-rate loans, the interest rate does not vary for the entire term of the loan. Therefore, it makes budgeting and planning for monthly loan instalments easier for firms.
Even if the loan is adjustable as per rate, company owners may use a simple spreadsheet to calculate future payments if interest rates change.
It is temporary
Once a company borrower has paid off the loan, they have no further responsibility or interaction with the bank until the borrower decides to take another loan.
Cons
Difficult to qualify
The most significant disadvantage of bank loans is that they might be difficult to obtain unless the small firm has a considerable track record or valuable collateral.
Banks will lend only to companies that can repay their debts and ensure that they can also cover losses in the case of failure. In addition, business borrowers may demand personal guaranty, implying that the bank may take the borrower’s assets if they fail to repay all or a part of the loan.
Enormous Interest Rates
Bank interest rates on small-enterprise loans can be pretty expensive, and the amount of money for which a firm qualifies is frequently insufficient to cover all of its demands.
Moreover, since the firm must service the loan and deal with extra funding to offset funds not provided by the bank, the high-interest rate on the capital it obtains frequently stifles business expansion.
Personal Funding
Personal funding is investing your own money into the business without any third party involvement. The best example of this is savings. hav
Using the money you’ve previously saved eliminates the worry about interest payments or other party involvement while making business decisions. However, it also implies that you will retain 100% of the firm’s profits.
Another example of personal funding is personal bank loans. If you choose a personal loan over a business loan, you will be responsible for the repayments and not your company. You may lose a personal asset if you cannot make the payment.
Let’s look at the pros and cons of using your savings to start a business.
Pros and Cons
Pros
- You will have total control and ownership of your company.
Cons
- You may lose all of your funds and stifle your company’s growth.
Government Funding
There are hundreds of government grants available for small companies, saving you money, reducing startup expenses, and helping your firm grow.
Government subsidies for new firms in the United Kingdom offer many rewards, from saving money on-premises and rates to purchasing a low-cost plant or IT equipment.
There are over 200 government grants available for small companies in the UK. Most small business grants are in place to establish a startup or new firm, create jobs, and stimulate the economy. However, there are limited grants available for more established enterprises.
Here’s how you can apply for a government grant for a new business.
Pros and Cons
Pros
- It is easier to acquire further grants once you have received one.
- Receiving contributions is an excellent approach to improving your organisation’s exposure and reputation.
- The rules for getting public funds are typically straightforward.
Cons
- Reporting obligations for public monies can be time-consuming and labour-intensive.
- There are government contracts involved. You may skip this stage if you are unfamiliar with legal terminology or are not a large organisation to afford a legal expert.
- Government entities are highly inflexible in their operations, with no room for flexibility or agility. As a result, the organisation will have to adjust to changes in the environment independently, with no help from the government.
- Most awards are for a limited time and will expire after a short period. So post that; you’ll have to start over after that, which might be time-consuming.
Crowdfunding
Crowdfunding is the utilisation of modest sums of money to support a new business initiative. It gives access to enormous networks by connecting investors and entrepreneurs through social media and crowdfunding platforms.
You can hold a crowdfunding event aiming to introduce a product or if you have encountered a business emergency.
However, some crowdfunding companies, such as Patreon and Substack, have expanded the scope of crowdfunding in recent years. They enable creative people, such as artists, authors, etcetera, to continue their creative activity by generating an income stream through crowdfunding.
Popular Crowdfunding platforms in the UK are:
While crowdfunding can be an ideal choice for some, it can be a bad idea for others.
Pros and Cons
Pros
- It might be a faster way to raise funds with no upfront costs.
- Pitching a concept or business online can be a beneficial marketing method and may result in media attention.
- It is an excellent way to test the public’s reaction to your product or idea – if people are excited to invest, your concept has a strong chance of succeeding in the market.
Cons
- When you’re on your chosen platform, you’ll need to put in a lot of effort to generate interest in your project before it opens, and it may require extensive resources (money and time).
- If you haven’t safeguarded your company idea with a patent or copyright, someone else could find it on a website and may steal your idea.
Community and Social Schemes
Many community development finance institutions (CDFI) exist around the UK to assist startups and social businesses in their local area. They offer cash and support to people who find conventional lending more challenging to acquire.
You can seek capital from a community development finance institute or a responsible finance lender as a new business.
Startups that serve the local community by providing local employment opportunities or boosting the local economy have a greater chance of receiving financing. Before applying for these programmes, ensure that your business initiative has a remarkable social impact on your community.
Pros and Cons
Pros
Access to business experts who are familiar with your location.
Cons
Community and social schemes are not realistic if your startup has a little social impact on your local community.
Grants
Over 150 awards are available to new enterprises in the UK, ranging from government funds to regional grants and incentives for specific industries or activities. The quantity of subsidies available to new and small enterprises varies according to the economic climate.
Some grants available in the UK are:
Something as noble as grants might seem like the perfect option, right?
Hold On.
Maybe it is.
However, let’s look at both sides of the coin.
Pros and Cons
Pros
They are non-refundable
One of the most apparent advantages is that you are not required to return the grants. They are similar to a government contribution, making them more enticing than other forms of financial assistance.
They increase credibility
Given how difficult it is to obtain a government grant, earning one can be a significant accomplishment for your business. As a result, your organisation has an excellent opportunity to utilise this as a benchmark when applying for further financing.
Cons
Writing a business proposal is problematic
Unfortunately, qualifying for government grants can be a time-consuming and challenging procedure. To be considered, your idea must check off several boxes, from sticking out from the crowd to establishing your value and meeting the stringent requirements.
You will need to draft a concise business plan for it. Here are some tips on how to write a business proposal.
You are legally bound
There are always conditions linked to government financing. For example, the grant will be provided to you only if the government deems your purpose is in line with their requirements. As a result, you must adhere to this, implying that your spending is virtually regulated.
It’s a temporary solution
While government handouts provide an immediate financial boost, they are unsustainable since they are only a short-term solution.
Angel Investors
An angel investor is a wealthy individual who offers financial support to small businesses or entrepreneurs in return for owning stocks in the firm.
They are high-net-worth individuals who invest in firms early on with their own money.
Angel investors’ assistance to businesses promotes innovation, which leads to economic progress.
Unlike venture capitalists, angel investors often utilise their own money. In contrast, venture capitalists manage pooled money from many other investors and deposit it in a strategically managed fund.
Pros and Cons
Pros
Payments are not required every month
Angel investment is not a loan; therefore, there is no monthly payment. However, it might aid your short-term cash flow. Angel investors are compensated after the conclusion of an acquisition or when additional capital is acquired.
Guidance and assistance
You are not only receiving financing from an angel investor, but you are also learning from them. It is essential for a company since you can rely on the investor’s expertise while making business decisions, leading to higher success.
Abundant networking opportunities available
Angel investors may connect you with new clients, increasing your sales. Investors can also connect you with other firms they have backed, leading to the formation of strategic alliances.
Cons
- Angel investors desire a quick return on their investment since they expect the firms to grow fast within three to five years. It implies that the investors will pressurise you to keep growing your firm, even if it goes against your long-term intentions.
Even though you aim to keep your company small, your aspirations may counter the expectations of angel investors.
- Support and guidance from angel investors can be limited.
While many angel investors are specialists in the fields in which they invest, this is not always the case because each angel investor contributes a unique level of experience.
Seed Funding
Seed investment, also known as seed capital, is a small sum of money used to establish a firm, support research, or develop a product. The seed financing method is quite similar to the equity funding procedure, in which investors pay money in return for a share in the company.
Most entrepreneurs, particularly in the IT industry, follow this route to get their firm off the ground. The amount of seed capital is heavily influenced by a startup’s valuation since this is how most investors assess their future return on investment (RoI) before engaging in a deal.
For example, these values might consider a company’s track record of growth, managerial strategy, market share, and risk level.
Pros and Cons
Pros
- Investors are always ready to take on the risk of failure involved in startups.
- Seed funding business agreements are negotiable and flexible.
- It follows a no-debt financing policy; you might have to give the investors some equity share.
Cons
- There can be a high interference of investors in your business decision-making.
- You will have to share all the profits with your investor, limiting your future profits.
- It’s not a long term solution. The investors pool their money in a new adventure to make a profit. When a business reaches a saturation point, they withdraw its investments.
Venture capitalists
A venture capital fund is a collection of money from several investors. Venture capitalists often invest in firms with a high potential for development due to the product and the people driving the business. This form of financing is more than simply the product; the firm’s entrepreneur is equally important in obtaining this type of finance.
Apart from financial aid, venture capital investment also provides you with access to business counsellors and mentors who have the expertise and knowledge to open doors for you through their contacts and distribution networks.
Pros and Cons
Pros
Business knowledge
Aside from financial support, gaining venture capital financing may give your startup a vital source of counsel and consultancy. Moreover, it will help you make more innovative corporate choices, including financial and human resource management.
Additional materials
A venture capital firm may offer active help in several essential areas, including legal, tax, and personal problems.
The two possible significant benefits are faster expansion and higher success.
Connections
Typically, venture investors are well-connected in the business sector. Therefore, making use of these relationships can be beneficial.
Cons
Control failure
In general, venture capital investment might worsen equity financing. Consider it to be equity financing on steroids. VCs may begin controlling your decisions, leading to you losing control of your business.
The level of their investment may decide how much influence they have over your firm should suffice.
Status as a minority owner
You may lose managerial control depending on the VC firm’s interest in your company, which may be greater than 50%. It might lead to relinquishing control of your own company.
Debt funding
Debt funding is a loan in which you make repayments and hence do not dilute your company’s equity. A bank loan is the most prevalent type of debt finance. Bonds are another type of debt financing in which a company or startup sells fixed-interest bonds to an investor to generate the funds needed to accelerate the company’s growth.
Pros and Cons
Pros
You don’t have to dilute the ownership of your company.
Cons
Since accessible loans are secured, you may have a negative impact on your credit score.
Asset financing
We have now arrived at our last type of funding for this article.
Asset funding is a fast-growing choice for UK businesses. With asset finance, you can leverage the value of assets such as vehicles, buildings, and equipment. If you want to purchase such assets but do not want to pay a sizeable down payment, asset finance may be the best option.
If you are borrowing cash, you must provide the lender with a security interest in the form of assets.
Asset financing enables a business to get a loan by surrendering balance-sheet assets and is typically utilised to meet a short-term cash requirement.
Pros and Cons
Pros
Increased cash flow
A rise in your cash flow will benefit your firm tremendously since extra working capital will significantly help you grow or invest in new technology for increased efficiency.
Risk reduction
Asset financing carries substantially less risk since you may lose the company asset if you cannot make payments. So, for example, you don’t have a risk of losing your house as you could with a regular bank loan.
Time for repayments
Many loan companies will enable you to make payments over time rather than in one big sum, managing your cash flow more effectively.
Cons
- If you are unable to make payments, you will lose your asset.
- You will pay more than the asset’s worth.
Interest rates on your loan will imply that you will have to pay more than your asset’s worth in the long run. Therefore, we propose that you assess this expense against any projected results from acquiring this type of credit.
Key Takeaways
Depending upon the information provided above, you can decide what funding works best for you.
- Loans: If you’re looking to take business loans straight out of the bank, decide if you want to take a large bank loan or a specialised bank loan.
- Personal Funding: The self-funding way is one of the most common ways to fund your business. It also enables you to retain full ownership of your business and do things your way, with no pressure.
- Government Funding: The benefit of government funding is that the governments provide them, which is much more secure and easy to apply.
- Crowdfunding: If you’re looking for a way to fund your business through social media and people-centric funding, crowdfunding is the way.
- Community and Social Schemes: These are available in abundance in the UK, and if your business qualifies, you can surely try them. Acquiring such schemes improves business credibility and sometimes provides free marketing.
- Grants: Like social schemes, acquiring grants gets you money, mentoring, and credibility in the business. Although numerous grants are available in the UK, they are incredibly competitive and rigorous but still worth trying.
- Angel Investing: An angel investor is a wealthy individual who provides financial assistance to small firms or entrepreneurs in exchange for equity ownership in the company.
- Seed Funding: Seed capital, also known as seed investment, is a small quantity of money used to start a business, fund research, or develop a product.
- Venture Capitalist: A venture capital fund is a pool of money from many investors. Their money is invested and managed on their behalf by the fund.
- Debt Funding: Debt finance or debt financing is a loan to make repayments and does not dissolve your firm’s equity.
- Asset Financing: Asset financing uses a company’s balance sheet assets, such as short-term investments, inventory, and accounts receivable, to borrow money or secure a loan.
FAQs
What are Local Enterprise Networks?
In England, local enterprise partnerships (LEPs) are voluntary partnerships between local authorities and businesses established in 2011 by the Department for Business, Innovation, and Skills to help determine local economic priorities and lead to economic growth and job creation in the local area.
What are Overdrafts?
If you simply require a modest amount of money, such as £1,500, an overdraft on your company bank account might be a viable alternative. You pay interest solely on the amount you utilise.
What is The Prince’s Trust?
The Prince’s Trust is a grant provided in the UK to small businesses. Through their entrepreneurial initiative, they not only support loans of up to £1,000 to £30,000 (average £5,000) but also offer training and mentorship to 18-30-year-olds in the UK.
What is Innovate UK?
Innovate the UK is a non-departmental public agency supported by a grant-in-aid from the United Kingdom government. Innovate the UK provides grants and financing in various innovative fields such as agriculture, biosciences, digital health, and space technology.
