Setting up a new business can be an exciting experience, but there are often hurdles in your way that may prevent you from achieving growth.
Funding a business can often be one of the main obstacles to overcome. Many mainstream lenders, like banks, are less unlikely to lend to start-ups unless they have demonstrated their income streams or prooved that their business concept works.
This issue has only been amplified by recent events that have made many lenders more risk-averse about investing in new and untested companies.
Nevertheless, the money to cover the costs of growing the business has to come from somewhere.
Often, this will be the business owner’s private finances. However, great business ideas cost more money to implement, than the person who came up with them can afford. This is where business finance for start-ups becomes so essential.
Finance options for start-ups
Despite the challenge of acquiring finance during the early stages of a business, there are many options available to entrepreneurs to fund their company’s development.
A business start-up loan continues to be one of the best ways to get a business idea off the ground. Ultimately, the bank will need to be persuaded that there is a low risk of you defaulting on the loan.
The best way of doing this, and a basic requirement of the application process, is to provide a detailed business plan with robust forecasts.
While there are currently fewer business loans for start-ups available on commercial terms, several lenders are offering Government-backed loans with support from the British Business Bank. While similar to some of the Coronavirus business support schemes, these are not directly part of the response to the Coronavirus outbreak.
Rates for start-up loans currently sit at around six per cent, with loans generally available for £3000.00 or more.
In some cases, the lender may ask for the loan to be secured against a personal asset, such as a home (known as a secured loan) or request that a guarantor is nominated. As with other forms of consumer finance, a guarantor guarantees someone else’s loan or mortgage by promising to repay the debt if they can’t afford to.
Investment generally entails funding a business in exchange for equity in the business.
Investors can be private individuals or institutions and range enormously in how experienced they are and how hands-on they are with a business, amongst other things.
Investors will vary significantly in the size of the stake in the business they want for their cash, and deals can allow you to buy back some or all of your original stake if the right criteria are met.
There are several tax-advantageous schemes for outside investors. Businesses can use these to attract millions of pounds of outside investment each year in some cases.
All parties need to conduct thorough due diligence when undertaking an investment deal, and careful consideration should be given to any agreements reached.
How an investment is structured will have significant ramifications for the future of your business, your control over your company and how much tax you may pay. Therefore, you must obtain professional advice at the earliest stage if you are considering seeking investment externally.
Angel investors are generally individual business owners or, increasingly commonly, collectives of business owners who put their spare cash into high-growth start-ups in exchange for equity in the business.
Investors usually provide funding in exchange for convertible debt or ownership equity and are well known for supporting start-ups early on in their lifecycle.
It is common for angel investors to invest online through equity crowdfunding or organise themselves into angel groups or angel networks to share investment capital.
One of the main benefits of angel investment is the knowledge and experience of the investors, which you can draw upon to help you overcome the challenges you face as you establish your own business.
Angel investments can be extremely high risk for investors, which is why they often require a very high return on investment.
In some cases, angel investors may be interested in angel investing for reasons that go beyond monetary return. This is often the case for entrepreneurs and executives that are looking to help other businesses grow.
Depending on their circumstances, angel investors can also benefit from tax-efficient investment funds outlined in this guide.
As with other forms of outside investment, you should undertake due diligence and seek professional help if you are obtaining funding from angel investors.
Family loans and investments
The ‘Bank of Mum and Dad’ is well-known for helping first-time buyers make their first step on the housing ladder, but it can also be a good way of obtaining the finance needed to start a new business. Of course, family loans and investments can come from any friends and family and not just parents or grandparents.
This route to obtaining finance has several key benefits, including flexibility and low or no interest rates.
The downsides include the potential for undermining family relationships if things go wrong, such as through the potential for disputes over the terms of a loan or your management of the business.
Soft loans and grants
There are a wide variety of loans and grants that fall under the category of soft loans and grants, but they are generally those that have Government backing and better terms than are generally available elsewhere.
Soft loans include the Government-backed start-up loans referred to above, as well as those available from third sector organisations, trade bodies and local Government organisations.
Similarly, grants tend to be Government-backed but can also be offered by third sector organisations, large businesses, trade bodies and local Government. They tend to be offered for specific purposes or with conditions restricting their use to capital expenses only.
Both soft loans and grants can prove to be highly effective avenues to getting your business off the ground.
Crowdfunding is a relatively recent development that enables businesses to obtain finance from a large number of people who individually contribute a small amount but collectively contribute a significant sum.
Crowdfunding is usually sought through various online platforms, although there are some notable examples of large businesses setting up their own crowdfunding platforms.
Generally, crowdfunding offers either loans or equity in a business, but it can also involve early access to the business’s new consumer products, unique gifts or donations.
Get help to finance your start-up now!
Here are some examples of the funding currently available to start-ups in the north of England:
- Start-Up loans
- Northern Powerhouse Investment Fund – MicrofinanceNorthern Powerhouse Investment Fund – Debt Finance
- Northern Powerhouse Investment Fund – Equity Finance
- Rosebud Finance
- GC Finance Business loans
- Greater Manchester Export Fund
- GC Angels Early-Stage Equity
- Recovery Loan Scheme
- IWOCA Business Loans
If you are struggling to find suitable finance for your start-up or small business, we can help.
We have worked with dozens of entrepreneurs to help them secure the money they need to grow and flourish, so get in touch today.