How to get funding for a business

Different types of finance

While numerous financing options exist, and a diverse array of individuals and institutions are ready to fund a business, funding options typically fall into one of three categories.

Business Loans: This involves a person or company providing you with a sum of money that you must repay with interest in the future.

Grants: This is where you receive money to start or grow your business that you don’t need to repay. Grants are often competitive and have tough qualifying criteria.

Investors: Various individuals are willing to buy a stake in your company in exchange for a share of your equity and profits. Additionally, crowdfunding platforms enable individuals to invest in your business in exchange for rewards or offers.

What funds might I need?

Businesses require funding for all sorts of things. Some small ventures, such as freelance writing or accountancy businesses, may only need a laptop and a wi-fi signal. However, others require a more substantial capital investment to secure premises, manufacturing equipment, advertising and raw materials. 

Think carefully about what you need to start your business and your operating costs. Ideally, you want to keep borrowing as low as possible, so try and separate what you genuinely need from things you want.

What do I need to secure business finance?

Whether your business is new or moving to the next level, you need an in-depth business plan and a cash flow forecast, which show how the business intends to make money and when you think it will be profitable. If you’re getting a loan, you need to convince lenders that you can repay what you owe. When constructing your business plan, consider the following:

• Start-up phase costs

• On-going costs (including future employees' salaries)

• The amount of profit the business needs to generate to provide an income you can live on

• How you will manage financially if the business isn't profitable right away

• Whether there's a market for your goods or services and if you can sell them at a profit

• How you will repay any loans you take out

• Whether you're willing to give up shares in your business.

Where to get finance

These are some of the key financing options you should consider:

Start Up Loan scheme

The government Start Up Loan scheme enables individuals to borrow between £500 and £25,000 to start or expand a business. You pay interest at 6% and have between one and five years to repay the loan.

It is an unsecured personal loan specifically for start ups, so you must carefully consider whether you can afford the repayments. Failing to make them on time could seriously damage your credit score. You need to pass a credit check to get this type of loan.

The scheme offers free support and guidance on writing your business plan, and successful applicants also get up to 12 months of free mentoring. 

If you have an established business, you need to have been trading for less than three years to qualify. You can apply on the GOV.UK website.

Small business grants

There are hundreds of small business grants available in the UK. Typically, they are targeted to specific kinds of business. For instance, they may be aimed at a certain region, business sector or company size. 

Applications are often complex, with lots of stages and hoops to jump through, but the good news is you don’t usually have to pay back any money you receive. While some grants are available for growing companies, most target individuals who wish to launch new businesses.

You can see what’s available on this list of government-backed grants. Make sure you research the options carefully before you apply.

Business banking

You may be able to secure funding through your bank through a secured or unsecured loan, overdraft or business credit card. Overdrafts and credit cards can be expensive forms of borrowing, so you should only view them as short-term options. If you’re considering a bank loan, shop around for the lowest interest rate possible.

Crowdfunding

Crowdfunding involves raising money for your business by appealing to the public. There are a few different options to consider.

Peer-to-peer (P2P) lending: This works like a bank loan, but you get your money from a private individual. Plenty of platforms are available, including Zopa, Funding Circle and Ratesetter. You have to pay the money back at an agreed interest rate, typically set by the platform or the lender. The platforms will check your credit rating and the business’s cash forecast as with any other loan, but applications tend to be approved quickly. 

Equity crowdfunding: This allows you to crowdfund money in return for shares in your business. These shares are unlisted, which means they’re not sold on the stock exchange. Typically, you can raise more funds with equity crowdfunding than with P2P lending. The platforms are highly regulated, with rules around what can be raised and what can be invested.

Rewards crowdfunding: This is when you offer a reward in return for online contributions to your business. For instance, if you were creating a new product, you could provide the first 50 investors with an exclusive limited edition. You could also offer discounts, services or special offers.

Angel investors

Business angels are sophisticated investors who invest their own money into small businesses in return for an equity stake. Typically, they like to invest early and for a higher stake in the business than other investors. For instance, it wouldn’t be unusual for them to need to offer between 10% and 25% of the equity. Often, they also offer support, skills and business knowledge. They tend to want to be involved heavily with the company.

Venture capital schemes

The government has three venture capital schemes that can help small or medium-sized businesses grow: the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), and the Venture Capital Trust (VCT). These schemes make it more attractive for people to invest in your company by offering them tax relief benefits. Each scheme has its own criteria that participating companies and investors must meet and limits on how much you can raise.

You can read about the three types in depth on the GOV.UK website.

Research and development grants

The government also offers research and development grants through UK Research and Innovation (UKRI). The money is usually available for specific products. It will only cover a percentage of the costs – but you might be able to access as much as £10 million depending on what you are developing. Use the InnovateUK innovation funding finder to see what’s available. There are also grants from private companies and European schemes, so it’s worth researching.

Personal capital 

Depending on your business plan, you may be able to fund your business from your own savings. Alternatively, plenty of successful entrepreneurs seek funding from family and friends during the early years of their business. Think carefully about what you need, and don’t jeopardise your personal or loved one’s finances.