Small business startup funding – Small Business UK


Going into business for yourself is one of the most exciting decisions you can make. However, on top of all the umpteen other decisions you have to make, such as deciding on your USP or writing a business plan, you also need to think about how you’re funding those nail-biting early months.

>See also: Alternative business funding for small businesses

Startup funding for any small business can be a minefield, so here is a guide to the options available to you in those early days.

10 ways to find small business startup funding

#1 – Bootstrapping your business

By yourself

Basically, you are pulling yourself up by your own bootstraps, which means startup funding your small business yourself, whether that’s through savings or, if it’s a side hustle, using part of your monthly salary to get things moving. Or you could max out your credit card and cross your fingers.

Pros

You keep 100 per cent of your business equity and you are not answerable to anybody.

Cons

Establishing yourself as a sole trader costs money, whether it’s registering at Companies House or building a website, regardless if you design one off-the-shelf or employ a web designer. And once you get into Facebook advertising, you will be amazed at how quickly your personal bank account drains before those online sales convert.

Family and friends

There’s no shame in borrowing from family and friends. If they believe in you, they will lend you the money. Think of it as your first market research.

Or they could even invest in exchange for an equity share in your nascent business.

Pros

It’s a simple agreement where you repay the amount borrowed plus an agreed amount on top. Plus, it’s quick to arrange.

Cons

If you’re taking on equity investment, do put everything in writing. And get a solicitor to cast their eye over it. There’s great room for family rupture here – especially if your business is a success. I know of one family whose son created a household brand; what seemed an innocuous shareholding gifted to a grandparent is now potentially worth millions – and has the entire family at daggers drawn.

#2 – Bank loans

There’s a saying that a bank will only lend you an umbrella when it’s sunny – and snatch it back when it rains. It’s important to be clear that banks do not invest in your business, they lend money. And usually they want to see a track record of profit-and-loss before lending, which makes a bank loan unsuitable for small business startup funding.

Assuming however that your kindly bank manager does approve your loan, there are two types: unsecured (i.e. an overdraft) or secured, which means putting up a personal guarantee, such as your house. If things go wrong, you could be homeless. Dragons’ Den TV star Touker Suleyman told SmallBusiness that he lost his home to Lloyds Bank after he used it to secure a loan – but he still stayed on as a Lloyds customer.

Pros

Probably your first port of call if you have a personal account. Setting up a business account is fairly straightforward, subject to identity checks, and you can arrange an unsecured overdraft or be issued with a business credit card at the same time.

>See also: What are the best business bank accounts in the UK?

Cons

Arranging a bank loan can be a protracted process. And banks are not afraid to reach for debt collection agencies if you consistently miss repayments, which can be unnerving.

#3 – Fast loans

Technology has changed the small business startup funding landscape, especially if you run an e-commerce or a retail business. Payments giant PayPal offers its PayPal Working Capital merchant advance, repayable through a recoupment corridor in sales you make through PayPal. Iwoca offers a similar revenue-based loan, as well as its digital flexi-loan product, which offers loan approval within minutes. Meanwhile Funding Circle arranges loans of between £10,000 and £500,000 with approval again in minutes.

Pros

Fast, easy to use and transparent, fast business loans which use open-banking technology, are becoming increasingly popular for SMEs.

Cons

For a small business seeking startup funding – revenue-based lenders apart – this next generation of SME lenders will want to scrutinise your accounts, making them unsuitable for a complete startup. Plus, interest rates can be high, eating into your cash reserves.

>See also: Fast business funding and loans

#4 – Start Up Loan

The government offers a Start Up Loan of £500 to £25,000 to start or grow your business. This is an unsecured personal loan aimed at those who cannot even go to their bank for funding.

Start Up Loans are government-backed and charge a fixed interest rate of 6 per cent per year.

You can repay the loan over a period of 1 to 5 years. There’s no application fee and no early repayment fee.

Last year, the government announced that it would provide funding for 33,000 Start Up Loans over the next three years.

Pros

You get free support and guidance to help write your business plan and successful applicants get 12 months of free mentoring.

Cons

As with any loan, repayments can quickly become a millstone if your business idea fails crashes and burns.

#5 – Crowdfunding

Great for quirky or creative business products that excite the public’s imagination. The two biggest crowdfunding platforms in the UK are Seedrs and Crowdcube. Investors generally invest between £100 and £50,000 through crowdfunding platforms. So a business raising £100,000 could potentially have hundreds of shareholders. Famous brands that have gone down the crowdfunding route include Brewdog, Monzo and Peleton. Recently US fantasy author Brandon Sanderson looked to raise $1m for four books he’d written during the pandemic – so far his Kickstarter raise has hit nearly $42m.

>See also: Crowdfunding UK small business: everything you need to know

Pros

Again, crowdfunding can be a great way to gauge public interest in your product or service. Shareholders can become advocates for a consumer business.

Cons

A lot of thought needs to go into creating a crowdfunding campaign, with different reward tiers for investors.

And for a campaign to be successful, you need 30-40 per cent of the money you’re raising already committed before campaign launch (the crowd follows the crowd), so you still need to find backers first.

Also, the average amount raised through an individual crowdfunding campaign globally is $794 and the average amount raised for projects involving multiple campaigns is $30,339. Plus, only 50 per cent of crowdfunding projects are ever funded. What happens if you don’t reach your target?

#6 – Angel investors

Angel investors are often retired businesspeople who have experience in your area of business. As such, you could find yourself with a valuable mentor or adviser in exchange for giving up a slice of equity.

Amounts are likely to be between £5,000 and £100,000.

According to Beauhurst research, angel investors injected more than double the amount of capital into private UK companies in 2021 than in 2020, from £11.3bn to £22.7bn. In fact, the number of angel investments into unlisted UK start-ups overtook crowdfunding for the first time since 2014 in 2021.

Pros

Angel investors commit right from a back-of-an-envelope idea and they are patient capital – they know they will have to wait to be repaid before you go and raise further funding.

Cons

You’re not fully in control of your business anymore and could find yourself stuck with a meddlesome partner.

>See also: Top UK angel networks for your start-up

#7 – Venture capital

Venture capital is the next stage on from angel investment, often involving millions of pounds. As such, it is unsuitable for most small business start-up funding.

However, venture capital is increasingly getting involved in earlier and earlier stages of start-up funding. Called pre-seed funding, this is very entry level. According to early-stage VC fund RLC Ventures, pre-seed rounds start at around £150,000 going up to £500,000.

>See also: Series A to Series D, everything you need to know about funding rounds

Pros

Venture capital at this stage is not just about money but also offers advice, networking and strategy.

Cons

As with any equity investor, you’re giving up a share of your business. Plus, venture capital is looking for a BIG idea that addresses a HUGE market, so it’s not suitable for say, a dry-cleaning business or a gardening outfit.

#8 – Bootcamps and incubators

Bootcamps and accelerators run support and mentoring programmes mainly for tech-based startups or businesses in a particular niche. Programmes typically last anywhere for three months up to a year. Business accelerators usually take 5-10 per cent equity in exchange for initial seed funding averaging between £10,000 to £30,000.

For example, British beauty brand Five Dots Botanics was chosen to take part in the Sephora Accelerate programme in March 2020. The US makeup giant picks a dozen female-led businesses from around the world. Founder Zaffrin O’Sullian told SmallBusiness: “We want to take the business up to the next level, to distribute globally you need access to working capital.”

Pros

Mentorship from experts plus equity seed funding and a chance to “get in the room” with interested investors.

Cons

The application process can be time-consuming and grueling and requires a time commitment for must-attend accelerator events and networking.

#9 – Grants

Grants are in effect free money and there is a plethora of grants either regionally, nationally or by sector. A grant does not have to be repaid.

>See also: 150 UK small business grants to apply for right now – UPDATED

Pros

It’s a grant – free money, no repayment

Cons

Applying for any kind of grant is time consuming without any guarantee of success. And the application deadlines may not fit in with when you need the money by.

#10- EIS and SEIS

SEIS and EIS are government-supported tax-based investment schemes to encourage investment in small businesses. Launched in 1994, EIS has been tightened to focus mostly on knowledge-based economy companies and must involve real risk for investors. At one time, too many financial services spivs were selling EIS schemes to investors offering tax reliefs with minimal risk.

EIS

EIS encourages investment in innovative start-ups. According to HMRC, in the 2020-21 tax year, 3,755 companies raised £1,658m through EIS.

You can raise up to £5m (or in some cases £12m if your start-up is “knowledge intensive”) through EIS.

SEIS

The sister scheme of the EIS, established in 2012, offers even more generous tax breaks for investors in very early stage business. In 2020-21, just over 2,000 companies raised £175m between them using SEIS.

The maximum raise you can raise under SEIS is £150,000.

To be eligible, your start-up must:

  • Trade must be less than two years under SEIS or seven years under EIS
  • Have fewer than 25 employees under SEIS or 250 employees for EIS
  • Have no more than £200,000 gross assets or £15m for EIS

You can find an HMRC guide to SEIS here.

Further reading

Small business finance – the complete guideCash flow is one of the biggest headaches for small business owners. Bank loan applications can be cumbersome. Yet there is a nimbler generation of lenders who can get money into your bank account fast



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