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Sources of finance for a new startup

When you decide to start a business, it’s an exciting time. Unfortunately, maintaining this enthusiasm and momentum is challenging – especially if you don’t have access to funding. Finding sources of finance can be tricky and, at times, elusive. After all, traditional business loans require at least a year in business (or more).

While this is true, it doesn’t mean you don’t have options. Keep reading to learn about some of the most popular funding options for startup businesses.

A Personal Investment

When it comes to sources of finance, this one may be obvious. When starting a business, you can choose to make a personal investment. This may include your savings or other assets you have.

It’s impossible to start a business if you aren’t willing to put something you own in it. Also, other people may not be willing to give you money if you aren’t willing to invest in yourself.

Sometimes, the unwillingness to invest in yourself conveys that you aren’t committed to your venture or that you don’t believe in its ability to be successful.

Family and Friends

When it comes to sources of finance for your business venture, proceed with caution if you choose this one.

You can ask for a loan from your friends, parents, spouse, or other family members. Bankers call this “patient capital.” It is money that is repaid once your business becomes profitable.

If you decide to borrow money from family and friends, there are a few things to remember:

  • They may want equity in your business
  • Sometimes they don’t have as much capital to give
  • Business relationships with family and friends need to be taken seriously

This isn’t right for everyone because if you cannot repay these people, there may be hard feelings.

Small Business Association Microloans

When it comes to sources of finance for small and startup companies, turning to the Small Business Association (SBA) is a popular option. The SBA microloan program partners with intermediary, nonprofit, and community-based lenders to provide borrowers with $500 to $50K to get going.

The loans have interest rates that arrange between eight per cent and 13 per cent. The term lengths of the loans never surpass six years.

Along with funding, the SBA works with you as a mentor. This helps ensure that the business has the best chance of success possible.

Keep in mind that with all these appealing perks, there’s a lot of competition for these loans. That makes the application and approval process for an SBA microloan daunting and long. If you want to find sources of finance that come to you faster, then considering some of the other options mentioned here may be best.

Angel Investors

An angel investor is a wealthy person or retired company executive who wants to make a direct investment in a small firm or startup company.

Usually, angel investors are considered leaders or experts in a specific niche or field. They contribute with the network of contacts they have gained through the years and their hands-on experience. Angel investors may also offer management and technical knowledge.

While this is a viable source of financing, it’s important to know that an angel investor may monitor the startup management process and want to have a say in how your business is operated in exchange for the investment they make.

Venture Capital

Venture capital isn’t right for all entrepreneurs. From the very start, venture capitalists have been searching for tech-driven companies with huge growth potential in the biotechnology, communications, and information technology sectors.

Most venture capitalists will also take some equity from the business. This means that you have to give up equity or ownership in your business to someone else. Also, venture capitalists expect to see a significant return on the investment they make. Usually, this is seen when the business begins selling shares to the public. If you choose to go this route, be sure you search for investors who have knowledge and experience in your industry or field.

A Business Line of Credit

Do you want a more flexible source of money for your business venture? If so, consider accessing a business line of credit. Sometimes, this is described as a hybrid between a traditional business loan and a credit card. A line of credit is a sum of money a lender offers you. With this, there is a maximum amount you can borrow.

It is possible to draw from the line of credit for almost any business purpose and for any amount, as long as you don’t surpass the given limit.

One of the main advantages of a business line of credit is that you only have to pay interest on the amount you have used at a particular time. For example, if you are given a credit limit of £45,000 but only use £15,000, you only have to pay interest on the £15,000 you are using.

Along with superior flexibility, there are a few other advantages to choosing a business line of credit rather than the other sources of finance. These advantages include:

  • Flexibility for fluctuations in your cash flow
  • Can withdraw money at any time and for any business purpose
  • A great way to begin building a credit history for your startup
  • More accessible for those who don’t have a great credit score

Because of the reasons above, a business line of credit is an option that you should consider, especially if you need funding for your initial year of business.

Incubators

An incubator is an organisation, company, or university that will provide you with resources for your startup company. The resources may include cash, consulting, marketing, laboratories, office space, or anything else you may require for operations.

You may wonder what incubators want in exchange. They understand you are in a vulnerable position as a startup company. Because of this, they will usually require equity. The reason for this is because they see potential in what you are doing (or plan to do) and want to profit from it down the road.

Government Subsidies and Grants

Some government agencies offer financing, such as subsidies and grants that your business may qualify for. You can find an entire listing of these opportunities online.

It’s worth mentioning that getting a grant can be challenging, and there is typically a lot of competition. The criterion for the grant is often stringent, too.

Usually, the grants require that you match the funds you receive, and the amount you get depends on the granter.

Equipment Financing

If you require startup funding to buy equipment, consider equipment financing as a funding option. One of the benefits of this is the self-secured nature that it offers.

The equipment you purchase with the funds is the collateral for the funds. Because of this, equipment loans are usually easier to qualify for, even if you haven’t been in business very long.

While some equipment lenders have set requirements for the time you have been in business, most won’t require this as a financing stipulation.

Crowdfunding

As the name implies, crowdfunding is when you get funding from crowds, which means the general public. Usually, an entrepreneur will use this option if they develop a product that is needed by people and not available anywhere else.

You can utilize crowdfunding websites, which let the public pool together their funds to help different businesses and causes. Every platform member can contribute just $10, and the money will go a long way if enough people contribute.

If you choose a quality crowdfunding platform, you can start advertising your cause to get more contributions.

Bank Loans

Bank loans are another source of financing you may want to consider. These offer several benefits and customised repayment schedules. It is a good idea to shop around and find the right lender in this situation.

It’s important to note that you need to have a good track record in business and great credit if you want a bank loan. Just having a great idea is not enough to get this source of funding; you must back your idea up with a well-written, solid business plan. Most startup loans from banks also require a personal guarantee from the founder.

Invoice Financing

Unlike bank loans, invoice financing doesn’t require much time in business. With this option, you get a portion of your outstanding invoice value advanced.

To utilise this option, you must have a minimum of one invoiced customer; however, you don’t have to have much time in business to qualify.

What Sources of Finance Are Right for You?

When you start a business, it is often a labour of love. You put your all into it to help ensure its success. However, success may remain elusive if you don’t have the necessary funding. The good news is, there are more than a few sources of funding you can choose from. Each of these offers pros and cons, and you can review the information to find the one that best suits your needs. You can also work with our team at Accountancy Cloud to help ensure you get the foundation needed for long-term success.

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Credit cards

Some businesses fund their short-term spending through the use of credit cards. This has been encouraged by the availability of competitive deals such as introductory interest-free offers.

While many credit card providers discourage the use of personal credit cards for business purposes, there are now a number of credit card offers specifically targeted at new business owners.

Credit cards can help a business to finance its short-term needs, but they don’t make sense for long-term borrowing. Although initial interest rates may be attractive, the interest costs of credit cards are usually higher than overdrafts and loans, unless you can repay the outstanding balance each month.

Private equity investors

Private equity is money that is invested in your business by a third party in return for a share of the ownership. This may be provided by a commercial organisation such as a venture capital firm or private investors who are known as business angels. This type of finance is available only to limited companies. Private equity funding is not available for businesses that operate under a sole trader or partnership legal status.

Private equity is not usually secured on a company’s assets, so the investor faces the same risks as the other shareholders. If the business fails they will lose their money. Investors achieve a return on their investment through the payment of dividends by the company and the value they achieve for their shares when they are sold.

Venture capital

Venture capital is a means of financing a business where a proportion of your business’s share capital – or equity – is sold in return for a cash investment in the enterprise.

It means that some measure of control or ownership over your business has to be given to the new shareholder. Most, but not all, venture capital investors are looking to make quite large investments, often over £1 million, which excludes them from providing finance to the majority of start-ups. The British Private Equity and Venture Capital Association (BVCA, www.bvca.co.uk) publishes a list of member firms, their contact details and the types of funding that they provide.

Business angels

Business angels are private investors who look for opportunities to invest money into new or growing businesses. Most regions of the UK now have business angel matching services, which encourage local investment and mentoring on a smaller scale. The UK Business Angels Association (www.ukbusinessangelsassociation.org.uk) matches business angels with small businesses requiring equity finance. Angels Den (www.angelsden.com) runs regional workshops for businesses looking for angel funding. Business angels are typically looking to invest funds of between £10,000 and £100,000, although they can also form syndicates of investors who will invest larger amounts.

Equity based crowdfunding

Crowdfunding is a method of financing that enables a large number of people to invest a very small amount of money in a business. A business seeking investment is usually matched with potential investors online via specialist crowd funding platforms such as Crowdcube (www.crowdcube.com) , Crowd2fund (crowd2fund.com) and Seedrs (www.seedrs.com).

Equity crowdfunding enables groups of investors to receive shares in the business in exchange for their investment. The value of their stake in the business can go up or down, as with any investment in shares.

The UK Crowdfunding Association has published more information about crowd funding, which can be viewed at www.ukcfa.org.uk.

Government sources of funding

A variety of initiatives operated by the Government offer help to business start ups, particularly those involved in technology, research and development (R&D) and exporting.

Grants

Grants provide finance to allow your business to undertake a specific project that, without financial assistance, would not be able to proceed. Such projects might involve the initial start up of the business, developing a new product or buying equipment.

A grant is usually a one-off payment and provides funding that covers a percentage of the costs of the project – normally you or your business will have to meet some of the costs too.

Unlike a loan, a grant does not usually have to be repaid unless you fail to comply with the specific eligibility requirements and conditions of the scheme. You will need to check that you meet the eligibility criteria for a particular grant and consider what will be required to satisfy the funders’ requirements. See BIF 369, A Guide to Applying for a Business Grant for detailed information about the process of securing grant funding.

The most widely available Government-funded grants are for R&D, but various grant schemes are available in the different regions of the UK.

Start Up Loans

Start Up Loans is a national scheme that provides loans to people of any age to help them start up or develop a business that has been trading for less than 12 months. The average loan amount is £5,000 and mentoring and support is provided to successful applicants. Go to our partner’s website www.startupdirect.org for more information.

New Enterprise Allowance (NEA)

The NEA is an initiative funded by the Department for Work and Pensions (DWP) that helps unemployed individuals to start up their own business.

To be eligible, an individual must be aged 18 or over and be claiming Job Seekers’ Allowance (JSA) or Employment and Support Allowance, and applicants can access the allowance from the first day of their claim. Lone parents who receive Income Support are also eligible to apply.

The NEA provides access to a mentor and financial support comprising £65 a week for 13 weeks, reducing to £33 a week for a further 13 weeks. Participants on the NEA may also apply for a loan of up to £1,000 subject to status, to help towards the costs of starting their business. Go to www.dwp.gov.uk/adviser/updates/new-enterprise-allowance for further information about the scheme.

Local authorities

The Economic Development Department (or equivalent) at your local authority may offer financial support to new and existing businesses, including grants and loans. Many local authorities also provide managed workspace units that offer low-cost office space for new start ups.

Community Development Finance Institutions (CDFIs)

Community Development Finance Institutions (CDFIs) specialise in providing finance to new and growing businesses that have been unable to secure finance through traditional routes such as bank loans. Most CDFIs are members of the Community Development Finance Association (CDFA, www.cdfa.org.uk), which can provide further information and the contact details of your nearest CDFI.

Other business support organisations

A number of locally based business support organisations administer a variety of schemes to help support new and expanding small businesses. Many of the schemes include business planning advice, training and some form of financial support.

Local enterprise agencies

Enterprise agencies provide advice and financial support to pre-start, start up and micro businesses. They will also be able to signpost you to other local sources of financial support.

The main types of finance provided by enterprise agencies are:

  • Soft loans, which often require no security and are used to support viable businesses that cannot raise all of the finance they need from other sources.
  • Grants, which may have narrow eligibility criteria. For example they may only be available in certain geographic areas or for certain business sectors, or for specific types of people (for example unemployed or young people) or projects (for example marketing or buying IT equipment).

Go to www.nationalenterprisenetwork.org for your nearest enterprise agency.

The Prince’s Trust and Youth Business Scotland

The Prince’s Trust and Youth Business Scotland help young people aged between 18 and 30, who are unemployed or under-employed, to start up in business. The trusts are aimed at disadvantaged young people who find it difficult to obtain finance from conventional sources. They operate from regional offices, arranging advice and training as well as grants and loans.

Shell LiveWIRE

Shell LiveWIRE supports young people aged between 16 and 30 anywhere in the UK who are either planning to start a business or are in their first year of trading. Shell LiveWIRE runs two business awards: the monthly £1,000 Shell LiveWIRE Grand Ideas Award and the annual £10,000 Shell LiveWIRE Young Entrepreneur of the Year Award. Go to www.shell-livewire.org/awards/ grand-ideas-awards for further information.

So as you can see there are many options to pick from, which one is right for your startup?