Whether it’s an accidental side-hustle which grew from a hobby or a meticulously planned start-up, launching your own business can be exhilarating (and pretty nerve wracking). The question is, if you’re thinking about starting a new business, how can you fund it?

We answer some of the most frequently asked questions we receive about start-up funding, and give you some pointers as to where you can get help.

What type of funding is available for a new business?

The good news is that there are lots of different ways that you can raise money to help fund your business, usually falling into three broad categories:

• Grants
• Loans
• Equity

What is a startup grant?

A business grant is a sum of money which doesn’t need to be paid back, so there won’t be any interest to pay either. Sound too good to be true? The upside is that this is free money, and some grants can be very large.

Granting organisations will often have other types of help available too, such as offering free or reduced rental premises, access to business mentors, or other operational and development support.

One of the downsides is actually finding a business grant. They’re often only available for a specific reason or group, such as a targeted age range or location, or for a particular purpose. You may get a grant that can only be used to buy assets when what you really need is help paying the rent on your workshop.

The grant environment is almost as varied as businesses themselves, so if you don’t fit into a specific box it doesn’t mean that you won’t find funding elsewhere.

Applying for a business grant

Because of the nature of grant funding, the grant application process can be quite long-winded so be prepared to fill out lots of forms. The good news is that setting the money aside for use as funding is a pretty good indication that the organisation awarding the grant genuinely wants to help.

 
You’ll normally need to explain (in detail) what your business is, or will be, and what you plan to use the money for. You will almost certainly need to include a business plan!

What is matched funding?

Some grants are made on a ‘matched funding’ basis. This means they will put in £X for every £x you put in, so it’s useful to check the terms before spending time on the application.

What was the New Enterprise Allowance?

The New Enterprise Allowance was a small business grant providing up to £1,274 over a period of 26 weeks, along with access to mentors and the possibility of additional loan funding.

Unfortunately, the scheme is now closed but it’s worth mentioning because there’s still quite a lot of of information about it online (which can be confusing).
 

Can startups use loans?

Loans are an extremely common way for businesses to access money in order to develop, and for many people they are the ideal solution. Banks and loan companies are usually very responsive and quick to provide a decision, so it might not take long for the cash to hit your bank account although you should always take time to go over the terms and conditions.

The amount you can borrow is, theoretically, unlimited – and usually the money can be used for any purpose as you see fit. Most banks will expect you to provide a business plan (there it is again!) or at the very least, a financial forecast before they make a decision.

Business loans and your business structure

Small business loans can be a great way to get cash so you can start building your new business. After all, they work for millions of other businesses around the world.

Normally if you take out a business loan as a company, then the liability for repaying it is with the limited company. Take out a loan as a sole trader, and the liability stays with you (our blog about the differences between companies and sole traders explains liability in more detail).

 
The main problem for a new business is that you don’t have a track record, so actually getting the loan can be difficult. Businesses with little or no track record may need to sign a personal guarantee which is a legal agreement to say that if the business doesn’t pay back the loan, you will be personally liable instead.

So, even if you operate as a limited company, you may still become liable depending on the terms of the loan.

Can I borrow money from someone else rather than the bank?

You could also take a loan from family or friends, but be cautious. Mixing business with family in this way might be a recipe for disaster and if the business goes bad, it can also turn your relationships sour.

If you absolutely must take a loan from someone close to you, then make sure you put it on a formal footing. Insist on a loan agreement in writing, and make sure they know the risks. Defaulting on a loan to a close friend or family member doesn’t bear thinking about.

Using equity to raise money for a business

In accounting terms, equity is the net worth of a business; the more equity there is, the more valuable the business. Owning shares in a company means that you own equity, and therefore a share of the profits, so you can sell equity (a share of the business) to raise funds. This is only available for limited companies though – sole trader businesses don’t have shares to sell!

It can be useful if you can’t afford a bank loan or don’t have good enough credit to get one, but it also means that when you make a profit, you’ll have to share it with your shareholders. The flipside to this is that if you don’t make a profit then there is nothing to pay, and that’s the risk that they take by investing.
 

 
It can also be a way to bring in money from professional or semi-professional investors. They want a return on their investment, so the money may come with an offer of help. Just remember that if you sell more than 51% of your business’ equity then it is no longer ‘your’ business! You might consider setting up different share classes (sometimes called alphabet shares) to protect your decision-making powers.

You can take equity investment from family and friends but just as with loans, the same health warnings apply. Make sure they know what they are getting into and make sure you put it on a formal footing.

Venture Capitalists and private equity

Your research into funding may include reference to Private Equity (PE) or Venture Capital (VC) funding. These are professional investment companies that provide funding for businesses.

They often deliver a hybrid approach between taking equity in the business and providing loan capital, but do remember that PE and VC firms are professionals and as such, just like a casino, they make sure the house is always ahead. It’s only really suitable for companies that have very high growth potential and a substantial business model.

Crowdfunding your start-up

Crowdfunding is where a ‘crowd’ of people fund a business or project, normally involving a higher volume of smaller amounts, rather than a larger amount from a single source. The process is usually hosted by a crowdfunding platform, such as Seedrs or FundingCircle, although terms and conditions do vary from one site to the next. For example:

• FundingCircle offers loan finance to businesses, which may be of interest for companies that can’t get funding elsewhere
• Seedrs specialises in supporting early-stage start-ups looking for investors interested in buying a package of shares, giving it the capital it needs to grow

There are lots of other options available, so take your time to research what’s available – and don’t jump into anything without doing the sums first!

Like most fundraising campaigns, you’ll need a rock-solid business plan, and a compelling pitch which explains what your business is and the potential benefits for investors.
 

What is bootstrapping, and is it an option for start-ups?

The term ‘bootstrapping‘ means the business funds itself using its own resources generated from operations. Early-stage start-ups will often use a bootstrapped approach to prove the concept of their business, and only take on different types of funding when they’re confident their idea is viable.

This does have its benefits. The business won’t take on debt early on, and you’re more likely to get loans at a better rate once you can prove that your business (and you running it!) works. You may be surprised at some of the companies that started out by bootstrapping their way to success, such as Dell Computers and eBay.

Bootstrapping works best when you have a clear plan to grow your business, and understand the good and bad points about growing in this way. Also called organic growth, bootstrapping tends to be slower than bringing in outside money, but it is much more reliable. Plus, you get to find out if your business idea works before you commit to hefty loans or equity sales.

Funding a new business isn’t always easy

The plain fact is that it’s often difficult to get the capital you need to get your business idea off the ground, especially if it is an unusual or disruptive one.

 
There are plenty of sources and types of funding, so when one door closes, another opens. Business grants are available from all sorts of different organisations:

• Young people can get help starting their business from The Princes Trust
• The GOV.UK website has a page dedicated to loans and grants available for companies
• The British Business Bank has information on grants and loans
• Grant Finder includes local authority grants
• Check out your local BID or growth hub organisation. Even if they’re not offering grants themselves, they usually have a database of granting organisations as well as help and advice for new businesses.

 
Learn more about our online accounting services for start-up businesses. Call 020 3355 4047, or get an instant online quote.