Funding your startup – What are the options?
Starting a new business can be daunting, even more so when you don’t have the available capital to hit the ground running. Most businesses need to secure funding in the early stages to help get their idea off the ground but finding the right funding option for your venture isn’t as easy as you may think.
We often get asked if we can connect our clients to funding options, so below we’ll briefly consider a few options available.
Startup Loans & Overdrafts
Business loans and overdrafts have traditionally been the go-to funding source for small business before private investors became popular. The startup loan scheme is a government initiative that provides a low-interest loans for new businesses, or capital to extend your existing business. The terms of the loan are generally very favorable for a new business compared to the very rigid traditional business loans, but beware that the loan is taken out by the entrepreneur themselves, not the business, and therefore are liable to return the money regardless of success.
The loan is taken out by the entrepreneur themselves, not the business
Governments often award small business grants to companies promising to create jobs and stimulate growth in subsections of the economy. Whilst there are a plethora of grants available for new businesses, they can often be challenging source of funding to try and secure. Some grants are only available to certain sectors, for example earlier this year a £5m grant scheme was launched for digital health companies. When you are looking for grants in a specific sector, it’s important to use a consultant, (such as Grantify for digital health grants), to help you prepare your submission – as this will increase the chance of success and make the whole process a lot more efficient.
Business accelerators offer new startup business a small investment in return for equity. They also provide additional benefits such as office space, mentorship, network access and an avenue into larger investment further down the line. Business accelerators are a fantastic way to get a new idea off the ground but bear in mind that the failure rate after leaving an accelerator is extremely high and many companies face difficulties in the transition due to the high level of guidance and assistance they receive in the early stages.
Crowdfunding platforms allow new businesses or individuals to pitch their idea online, to a large array of private investors. Crowdfunding allows larger numbers of investors to stake smaller amounts of money, resulting in the funding coming from many different places, unlike VCs where the money comes from one source. You should always keep in mind that it can take a significant amount of effort and preparation, along with a solid marketing campaign, in order to be successful in a crowdfunding campaign. As the Crowdfunding platforms are paid based on the success of the campaign (% of funding secured) it’s in their best interest to see it succeed, which means your business will get some decent promotion throughout the process. One of our clients is Crowdfunding on Seedrs right now, so feel free to check out Q Doctor’s campaign here.
VCs typically look for business that have proven concept and are ready to scale at an accelerated rate
VCs are by far the most ‘up and coming’ method of raising capital for new and exciting start-ups. UK startups raised circa £6 billion in 2018 from Venture Capitalists, in order to take their ideas forward past the early stage. Venture Capitalists are professional investors that provide a lump sum of capital in return for shares in the business, who are looking for growing businesses with big potential and traction in their market.VCs typically look for business that have proven concept and are ready to scale at an accelerated rate. However, additional funds will come with additional responsibilities and costs. VCs typically require an annual management fee and will ask for stringent financial reporting – often on a monthly basis.
Angel investors are investors backed by private finance, who are typically former entrepreneurs or affluent individuals. They invest in smaller start-up companies and, much like VCs, they offer lump sums in return for a small share of the business. This funding usually ranges between £10,000 and £50,000 and the Angel will often play a hands-on role within the business until everyone is happy. Angels can be an important addition to a business because they will have had experience growing and exiting businesses, meaning they can offer advice at key areas throughout your journey.
If the business is up and running and generating revenue, then invoice financing can be an easy way to raise quick capital, especially if the business provides long invoice payment terms of 30, 60 or 90 days. Invoice finance means that, for a fee, a third party will buy your invoice yet to be paid and settle up to 85% of the value immediately. Upon receiving settlement from the debtor, the third party will settle the remainder of the invoice, less a fee. This method is beneficial where capital is required quickly, perhaps to settle a large or unexpected bill without having to wait for customers to pay.
SEIS and EIS Funding
SEIS and EIS funding is a great scheme and has been really popular in the technology sector to date. The scheme is designed to offer tax relief to the individuals investing in your idea, immediately making the proposal of investing in your business more attractive. The amount invested under SEIS is capped at £150,000 and the tax relief can’t be applied for until 3 years has passed. The HMRC have an exhaustive list of criteria and excluded trades here, so it’s worth familiarising yourself with this list prior to starting the process.
The most important thing to think about when raising funds is, “Is this type of funding right for me and my business?” which seems quite an obvious thing to consider, but in truth, certain types of funding can add additional stress to an already stressful situation.
Whatever option you chose, it’s important to consider the pro’s and con’s of each carefully. Try speaking with other business owners that can share their experience in the first instance, as this can often be invaluable.
Best of luck!