Sources of Start-up and Growth funding in the UK

Seccuring the right source of business funding for your startup or during the growth phase of your business plays an important role in any successful business. For most companies, at some stage, the need for additional capital will arise. This post is a basic overview of the different sources of funding and we will elaborate on this with further more in-depth discussions on the specific sources of funding.

Banks are still the most common source of funding for new businesses in the UK, but there are other options – many entrepreneurs choose a combination of finance types 

Self funding

Most small businesses start on a modest scale; owners use their savings, investments and assets to help raise funding. 

Pros

You get all the profits and retain controlYou don’t have any interest repayments or loan charges (unless mortgaging your home) G It demonstrates your commitment, which can influence financiers at a later date

Cons

You’re using up cash reserves that could be useful if your business hits a rough patchAssets used to raise money, like your home, are at risk if you don’t keep up repayments 

Crowdfunding

There are two varying ideas as to how crowdfunding should be organized, and it bears understanding both concepts before any investment is made. Under most auspices, a goal is set for funding that is based on the need for a business to have enough startup capital, a candidate to be able to begin a campaign, a set number of items to be produced, or other known levels of accomplishment.

In one scenario, no matter how much crowdfunding is raised, the recipient gets the money. This leaves a void that must be filled by other sourcing, which can be through conventional loans based on use of crowdfunding as equity. Crowdfunding can be strictly based on reaching the goal and if that mark is not obtained, all funds are returned to the investors.

Pros

• Crowdfunding can be a great source of marketing and promotion of your business or product while raising money for it. Crowd unders are often sources of free promotion.

• Provided you have enough initial support for your crowdfunding campaign it can be a great source of investment from people you might not otherwise have had access to.

• Some crowdfunding platforms like Seeders and Crowdcube in the UK will provide your brand with additional publicity.

• Crowdfunding platform are also good for launching innovative products effectively, once again provided you have a innovative product.

Cons

• This approach seldom works for businesses who do not have enough support to get the first 20 – 30% of their crowdfunding campaign supported.

• The crowdfunding platform will take various levels of commission dependent on which one you choose to work with.

Friends and family 

This is a cost-effective way to get finance. To fund a short-term cashflow problem consider a loan. For a longer term solution, consider giving them a share in your business in return for investment. You need to be honest with investors about the risks, and should draw up a formal agreement. 

Pros 

Family and friends are more likely to be supportive of your ideaThe terms and conditions are usually more generous than those of a bank

Cons

It can sometimes test relationships There is often a limit to the financial capacity of friends and family and for that reason this is more suited to early stage funding.

Government support 

Your bank may ask for security against a loan – such as your business premises or house. If you have trouble providing this, you may be eligible for the Small Firms Loan Guarantee (SFLG). 

Grants

Discretionary grants are available for some new businesses, usually in specific industry sectors or geographical areas.

Pros

The money does not have to be paid back G You don’t give up a share of your business 

Cons

The application process can be longA grant typically only covers between 15-50 per cent of your costs 

Bank loan

You pay back a certain amount each month, plus interest, for a set period. 

Pros

A clear repayment schedule means you can forward plan your cashflow You don’t give up control of your business 

Cons

Banks can be reluctant to loan money to start-ups with no business track record Your bank will probably ask you to come up with a share of the capital 

Investments

If you’re prepared to give up a share of your business, consider investment from business angels – private entrepreneurs who typically invest from £10,000 to £2m. 

Pros 

You don’t have to make loan repaymentsYou gain contacts and skills of investor

Cons

You will have to relinquish some control over your company They may look for a management track record, so might not be suitable for new businesses 

ACQUIRING ASSETS 

At some point your business will need assets – machinery, computers, even premises – is it best to buy outright or should you lease, hire or rent? 

Loan If you want to own the item there are several options, including taking out a loan from a finance provider or friends and family. 

Pros 

Buying the item outright could be cheaperThe item can be classed as a business asset, so could be used as security for the loanYou may be able to claim tax relief on interest and capital allowances on the asset purchased 

Cons

You need to compare the cost of borrowing (including interest repayments and fees) against the cost of alternatives to make sure you get the best possible dealIf you don’t keep up with your loan repayments your goods could be repossessed 

Hire purchase (HP) 

HP allows you to buy goods on credit and you pay off the cost over a defined period. Although legal title passes to you at the end of the term, for tax purposes you’re classed as the owner from the outset. 

Pros 

You can choose fixed repayment so costs will not rise with interest ratesYou may be eligible for capital allowances, which allow you to offset the costs of some assets against the profits of your businessYou can claim the VAT back on payments 

Cons 

You may have to pay a deposit upfrontIt’s not suited to items where maintenance costs are high, or that go out of date quickly 

Leasing 

Unlike hire purchase, with leasing you never actually own the item. Instead you pay a finance company for the use of it, in regular instalments over a fixed period. 

Pros 

• As the repayments are scheduled, you can match them to your company’s cashflowAs part of the deal, the leasing company may include maintenance and insurance costs

• You can claim back VAT and deduct lease costs from taxable income 

Cons 

Items can’t be classed as a business asset if you need to arrange further borrowingYou may end up paying more in the long term 

Hire 

If your business needs equipment, office furniture, vehicles, manufacturing machinery and so on, first ask yourself how frequently you need to use them. If you only need the equipment occasionally, investigate hiring them in on a daily, weekly or monthly rental basis. 

Pros 

You don’t have to pay for maintenance or insurance Payments are tax deductibleYou only pay for the equipment when you need it

Cons

The goods cannot be classed as an asset of your businessIf you hire the item regularly it could be more expensive than buying it 

Funding the Business for Growth

Taking your business onto the next stage, moving to bigger premises, buying a competitor or investing in new machinery to handle bigger orders, often involves a further round of funding 

Bank loan

This can be a cost-effective option as interest rates in the UK are relatively low and the bank will only be involved while you are replaying the debt. 

Pros

If you have been trading for a few years, the bank may be more willing to give you a loan You have a clear repayment schedule so you can forward plan your cashflow

Cons

• You may be asked for some kind of security – particularly if the loan is over £25,000 

• Your loan could be secured against business assets – if you fail to meet payments the lender can close your business down

• The bank may ask you to come up with a share of the capital to fund the growth 

• The bank may require you to have a fall-back option, such as some kind of insurance 

Friends and family loan 

A cost-effective route to finance may be to ask friends and family for a loan or to invest in your business.

Pros 

Repayments should be flexible and are often cheaper than those of a bank

Cons

There may be a limit to how much you can borrow from friends and family and often the relationship might suffer the consequences.

Grants 

You could be eligible for a grant to help develop new products or enter new markets. 

Pros

There are grants for specific projects – such as developing in a specific region of the UK The money does not have to be paid back 

Cons 

The application process can be involved, demanding and competitiveA grant is unlikely to cover all your costs – typically you get 15-50 per cent of the totalGrants are usually for proposed projects only, not those that have already started 

Investment options 

External investment from a business angel (an entrepreneur who typically invests somewhere between £10,000 and £2m into small businesses) can be a reliable source of funding for growth. 

Pros 

You don’t have to make loan repaymentsAs well as funds they offer skills, contacts and experience

Cons

Not all businesses are attractive to investors – angels look for a good management track record and strong growth potential

Joint ventures 

Pooling the resources and expertise of two or more businesses can be a cost-effective way to grow both companies. 

Pros 

Working with another company could help your business develop new products, increase your capacity and move into new markets 

Cons 

You may have to relinquish some control over the management of the businessYou need to ensure you aren’t adding extra costs to your business or losing market share 

The Importance of a Business Plan

Regardless of whether you’re raising finance from a bank, friends, family or even investing your own money, you’ll need a sound business plan. 

Every business should have a realistic business plan – whether you’re starting up and looking for funding or if you’vebeen up and running for years.

A good plan can have many benefits: it will give your business a sense of direction, telling you where you’re going and how you’re going to get there. It’s also a vital document when you’re looking for funding – without one you can’t convince a potential lender that your business proposal is achievable. And it gives you something concrete against which you can measure your progress, keeping your company on track. 

Recent research also reveals that having a business plan can help increase your profits. Companies that undertake regular business planning have an average profit margin of 54 per cent, those that don’t average 35 per cent (source: Lloyds TSB). 

What should your plan include? 

A business plan doesn’t have to cover every single aspect of your business, but it does have to answer the following questions: 

What are the objectives for my business?

How will I achieve these objectives?

What are the risks involved?

What is the timescale? 

How much will it cost?

A lender will expect to see information on: 

• Management

• The key people, their experience and knowledge of the industry

• Product or service

• Details of the product or service you’re going to offer to

• Markets

• A description of the market size, customers, competitors and sales estimates are 

• Impact and measurement of Impact

Forecasting your financial needs 

Financial forecasting can be tricky. You need to forecast at least one year ahead and include any supporting assumptions and evidence (order books, sales enquiries, etc). Projections should include a monthly profit and loss account, monthly cashflow projections, balance sheets and a capital expenditure budget. 

Once you’ve worked out your projections you’ll know the total funding needed. You then need to explain how you plan to use those funds and how you’re going to repay them. 

Who can help? 

The first port of call for many businesses is their accountant but today businesses looking for funding are likely to seek advice from a Corporate finance consulting firm such as Caban Capital. Contact us if you need support.