How to Fund Your Business

When you’re starting a business, it’s easy to get caught up in the excitement of brainstorming, branding, and product development, and tempting to think that as long as you’ve got a great product or service, the money bit will just take care of itself.

The truth is, you’re probably not going to be making much, if any, money for at least the first six months that your business is operating … which means that you have to find a source of funding to keep your business going long enough to start turning a profit.

Types of Funding

1. Personal Investments

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This is the most common type of investment for small businesses. After all, it’s the easiest to access since you don’t have to apply to a bank or another source of funding, and there’s no interest or collateral required.

Friends and family can be another source of investment, but it’s very important to allow for the possibility of failure. No matter what your relationship is like with a person, get a solicitor to help you create an investment agreement. Better to have everything out on the table to begin with than to run into trouble later and ruin a relationship.

Pros

  • You retain total control over your business.
  • You don’t have to apply for a loan through a bank or similar institution.
  • If you apply for other funding on top of your own investments, other investors will want to see that you’re willing to invest in your own business.

Cons

  • You may lose your money, so you have to budget carefully and realistically.
  • If you have personal investments from friends and family and they don’t work out, you can ruin those relationships.
  • You probably won’t have access to as much funding as you would with other types of investment.

First Step

Look at your budget, your business projections, and see what you can afford. If you’re going to approach friends and family for investment, it’s a good idea to create a business plan to show them and to find a solicitor. Click here for our resource on creating a business plan.

2. Outside Investment

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There are many types of outside investment (also called equity finance), with some of the most common ones being venture capitalism and angel investing. The way this works is that you sell a part of your company in the form of shares to the investor in return for their money. They then take a share of the profits or losses of your business.

While venture capitalists tend to be interested in specialised businesses looking to raise between £2 and £5 million, angel investors are often willing to invest in smaller businesses. Similarly, venture capitalists take a much more active role in the direction of the company, while angel investors tend to be more in the back seat.

Pros

  • You can get large amounts of funding, depending on the investor.
  • You don’t have to rely on a bank or another lending institution.
  • The risks of running your business aren’t all on you, since your investors take on part of any losses.

Cons

  • You won’t have as much control over your business, since you won’t own all of it.
  • Finding investment can be difficult, time consuming, and expensive.
  • You have to have a limited company to sell shares in the UK. (Not a sole tradership or a partnership).

First Step

Create a business plan to show investors, and start to consider the type of investment you want.

3. Loans

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Loans are fixed sums of money that you get from a lending institution like a bank, or a Community Development Finance Association. You can also get private loans from other people, similarly to the way you would get private investment.

There are many different types of loans, but they differ primarily in terms of whether they’re secured or unsecured (whether you have to put up collateral to get them) and whether their interest is fixed (meaning that it will stay the same for the duration of the loan) or not.

Pros

  • You get the money from the loan for a fixed period of time.
  • You retain total control of your business, since you don’t have to sell any shares to get a loan.
  • Loans can help you get your business off the ground — it’s sometimes easier to get a start-up loan than to try to get investment in a brand new business.

Cons

  • It can be hard to get a loan. Banks aren’t lending nearly as much money in the post-recession years as before.
  • You have to keep up monthly payments, which might be difficult if you don’t have regular business coming in.
  • If your loan is secured with your property (like your house or your car) and you default, you could lose it if you can’t make your payments.

First Step

Create a financial forecast for your business and determine the amount of money you need for a loan.

4. Crowdfunding

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Crowdfunding is a relatively new method of funding in which you get lots of people to fund your business instead of just one or a small group. The way it normally works is you set up a crowdfunding campaign on the Internet (such as a Kickstarter), and you get people excited to invest in your business.

Pros

  • With crowdfunding you can bypass the banks and investors and get funding directly from the people your business is going to benefit.
  • When it works, you can raise money very quickly, and you normally don’t have to pay big upfront fees.
  • Your crowdfunding campaign can pull double duty as a marketing campaign, as it will usually raise the profile of your business.

Cons

  • Crowdfunding success doesn’t just happen on its own, and crowdfunding is not a good fit for every business. You need to have an audience that’s already interested in you before you can start to think about it.
  • You normally don’t get to keep the money you raise if you don’t meet your funding target: it’s all or nothing.
  • Funding a business via crowdfunding isn’t an exact science. What worked for one business might not work for yours, so there’s an element of risk.

First Step

Research crowdfunding success stories to see is there’s some overlap with your business and those that get funded. Look into different crowdfunding platforms to see which might be a good fit for your business. Ask your audience if they’d even be interested in crowdfunding you.

Success Story: Clear Books Crowdfunding 2013

Clear Books has a very successful experience with crowdfunding, raising over £1.5 million in two rounds of investment via our custom-built crowdfunding platform. Founder Tim Fouracre’s best tips for crowdfunding success?

1. “Always research and test your target community by asking them if they would be willing to invest.  Crowdsourcing opinion is a very effective way of testing the waters.”

2. “As with any form of fundraising, be crystal clear about why you are raising the money, what you intend to do with it and how your investors might benefit.  And remember that with crowdfunding, the benefits aren’t always just financial return.”

3. “Tell a compelling story and reach out to your community using all of the marketing and communications tools at your disposal, including email, social media and PR.  And do this long before you intend to start the crowdfunding – you need to get people learned and warmed up!”

5. Grants

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Grants are sums of money that you’re given by an institution, usually a government body. While you don’t have to pay a grant back, you will normally need to match the funds that you’re given with money from your own business, and applying for grants can be very difficult.

Pros

  • You don’t have to apply to a bank or find investors for funding.
  • You don’t have to pay back the grant or any interest like you would on a loan.
  • You retain total control over your business, since you’re not sharing anything with outside investors.

Cons

  • Grants are notoriously difficult to get, and you may have to invest in a grant writer to have a chance of getting one.
  • You usually have to match the grant amount you’re given with your own funding.
  • Grants are often awarded for very specific projects, so if you don’t have one that matches the criteria, you can’t apply.

First Step

Visit Gov.uk or Better Business Finance to research grant opportunities in your industry and area.

Remember…

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Having a business plan will almost always increase the chances of you getting any kind of funding. Check out our free resource on how to write a business plan.

Funding isn’t a fix for a bad business plan. If you find that you’re constantly needing new funding, chances are that you have bigger problems that you need to address in your business.

Getting funding takes time and patience, so don’t give up if you get rejected the first few times.

Always get professional advice before seeking any kind of funding — contacting your accountant is often a great place to start.

Posted by Rachel Allen

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