Ways of Funding Your New Business

Funding picBefore you seek the funding you believe you need to kick start your business, take a good in-depth look at what you’re starting. Would you invest in it? Then put yourself in the shoes of one of the investors on Dragon’s Den. What questions would they ask that we see trip up entrepreneur after entrepreneur each week? I’m not saying you don’t need the funding, or that you’ve got a bad idea, but anyone who you ask to invest in your business – your family, bank or angel investor – will want to know that they are sure to get their money back at some point.

My first suggestion before looking for external finance is to strip back your business plan and ensure that you’re asking for money only because you have to. It will work in your favour after all, because if the exercise shows that you don’t need to borrow money, then you have less to lose if it fails and less you have to share if it’s a roaring success.

If it transpires that you need a cash injection after all, then these are your primary options:

• Angel Investors
The UK Business Angels Association describes Angel Investors as someone who “uses their personal disposable finance and business or professional experience to invest in the growth of a small business, generally in start-up or early stage.” They will want a percentage of the business and success. However, their business knowledge and experience can add more value than the money alone.

• Borrowing from friends and family
This can often be the best way, because their interest rates are lower than anyone else’s and they won’t want an equity stake. Be open though and be prepared that they will want to know the ins and outs of the business, and rightly so. Also, borrowing from friends and family can put strains on relationships when times are hard.

Useful Links
Institute for Family Business

• Business Overdrafts / Credit Cards
These are short term options only. If you need to buy a laptop or low value item, and aim to pay it back before the end of the month, then this may be your best option. For any high value items or long term lending requirements, look elsewhere

• CrowdFunding
Emily Mackay, who launched Crowdsurfer, a search engine for crowdfunding and collaborative finance, explains what crowdfunding is and who it’s for:

Crowdfunding is the term for groups of people coming together online to contribute money to support something specific. It bypasses traditional intermediaries by linking funders and recipients directly. Crowdfunding takes many forms, including investment in equity (shares) in a company, charitable donations, donations in return for a tangible reward, personal and business loans (usually referred to as peer-to-peer loans), investment into a revenue-sharing or royalties arrangement, and many other types.

• Grants for start-ups
There are a host of grant options out there for very different businesses. Alex Smeets, CEO of Cambridge Funding Solutions, specialises in this area:

Grants to start a business are quite rare and tend to be small (£500 or so). If you’re starting a new business, check with your local authority if they happen to have any available. Alternatively you can apply for an Enterprise nation “Fund 101” grant, but the completion is steep. Almost all public sector grants funding for commercial businesses is for technology Proof of Market or technology R&D projects or for projects undertaken by social enterprises!

• Personal funds
What have you got to put in yourself? If you ask a bank or investor to lend you money to start-up your business, because you didn’t want to touch the money that you’re saving for a family holiday, you will get a big, fat rejection. Practice what you preach by investing what you have, which will actually support any application you make. WARNING: Do not re-mortgage your house, no matter how much you believe in what you’re doing! Only invest what you can afford to lose.

• Bank Loans
Contrary to media coverage, banks are lending. In fact, they’re very active in lending money to businesses that show evidence of putting their own money into the venture and can back up their application with security such as assets. Banks are still the first port of call for many start-ups because repayments are straightforward and can be planned and budgeted for in a forecast, and no-one has to relinquish any control over the business. Sadly, for many start-ups, banks can be reluctant to lend money to new business owners with no track record.

Useful Links
To compare the latest bank rates: British Bankers’ Association
Loans at preferential rates to young entrepreneurs (18-30 years old): Prince’s Trust

Cambridge City Council also have a list of funding options on their website at https://www.cambridge.gov.uk/funding-sources-businesses

Remember, however much you decide your business needs to borrow, you need to be confident that you can repay it all, including any possible interest, at a rate and timescale that allows your business to continue to operate and progress.