How to get funding for a startup

Katie Collins -

It can be difficult knowing how to get funding for a startup, especially if you’re new to business and industry practices. Do you apply for business startup grants or explore loans for new businesses? Or should you look to exchange equity for investment?

Answering all your concerns, and more, we explore the ways you can strengthen your bargaining position, and how to get funding for a new business.

Strengthen your position when finding funding for a new business

Startup funding isn’t always easy to come by, especially if you’re competing against countless other companies, each vying for loans and grants to start a new business. So, no matter the startup funding you’re hoping for, you’ll find the application process that bit easier if you properly prepare.

Startup funding begins with a good business plan

To give you the best chance of earning startup funding, you should have a comprehensive understanding of your company’s financials as part of your business plan. Not only will this prove you’re seriousness, but it’ll also demonstrate competency that you have considered the benefits of applying for new business loans or startup grants.

Similarly, if you’re approaching an investor for startup funding, you should be able to showcase an aptitude for your company’s numbers, to convince them to back your business.

How to finance a new business: learn to sell your vision

While it’s crucial to have a strong grasp of your company’s financials, if you want to qualify for startup funding you should be equally comfortable talking through your operations.

From demonstrating your business’ identity to evidencing your market research, any investor looking to offer new business loans or cash for equity will want to confirm you know your stuff. Learn to sell your vision with passion, and investors will naturally share in your excitement.

Develop a good relationship with your bank

If you’re hoping to secure one of your bank’s new business loans, it’s important to have a record of timely repayments. Qualifying for startup funding is competitive, so try to give yourself the best possible chance by ensuring the bank is onside.

Understanding new business grants

In short, business startup grants are sums of money that are offered to new companies to get the ball rolling. The difference between grants for new businesses and startup loans is that a grant doesn’t come with a payback obligation.

However, because ‘free money’ is generally in short supply, you are often required to jump through certain hoops to qualify for UK startup grants. For instance:

  • Some business grants may only be available to startups within certain sectors and industries. Usually, this will be highlighted clearly.
  • Startup grants sometimes come with conditions attached. For example, you might need to commit to creating positions within your company or there may be a stipulation that you use your startup funding to cover specific company costs.

How to get a grant for a new business

UK startup grants are found on a national and regional scale. Search for government grants for new businesses, to see the availability across your sector, or keep an eye out for university-backed startup funding – academic grants for new businesses are generally aimed at local companies.

Taking out a loan to start a new business

You’ve probably, at some point, taken out a form of credit or applied for a loan, whether it be credit card spending, purchasing something on finance, or even agreeing to a monthly phone bill. This is debt, and the same principles apply to taking out new business loans; you borrow money and pay it back with interest over an agreed period of time.

There are a number of ways to find funding for a new business, including applying for a credit card or hunting for startup loans. However, before taking out a loan to start a new business, make sure you are comfortable with the repayment plan and happy to put up the required collateral.

Understanding government startup loans

Government startup loans vary from £500-£25,000, and are designed to help your small business grow. Importantly, your business should be less than two years old.

All government loans for new businesses should be paid back within five years, and are charged at a fixed rate of 6% annually, so you should prepare reasonable proof that you can afford the debt.

Should you offer equity for startup funding?

When we talk about equity, what we’re really talking about are your company’s shares. Ideally, you would always maintain a 100% stake in your business, however, sometimes it’s necessary to trade shares for startup funding (if you want to avoid going down the route of acquiring debt from startup loans).

Before approaching an investor to offer equity in exchange for a cash injection, you should have both of the following prepared:

1.  You should compile a complete business valuation, including the cost of business and profits earned. By doing so, you’ll know exactly what each share is worth, and how much startup funding you should attain for a respective percentage.

2.  It’s crucial to have evidence of your company’s financial history, and profit/loss projections. It’s of paramount importance that you properly prepare your accounts, to gain the confidence of an experienced investor.

Investment funding for new businesses

Agreeing to part with a portion of your company is a big decision, even if it does secure startup funding. So, it’s important to consider your options. Generally, there are two kinds of investor:

1.  Angel investors

Angel investors are typically self-supporting and usually look towards offering funding for new businesses they have a vested interest in. As such, they often show curiosity around your day-to-day operations, beyond your accounts.

If your startup funding pot is still in early development, an angel investor could be your best bet; while their investment is relatively small, compared to a venture capitalist, it can offer stability and their personal involvement and experienced hand at business could be a priceless asset moving forward.

2.  Venture capitalists

A venture capitalist is often an individual representing a company or investment corporation, offering startup funding with the sole intention of making long-term profit. Contrary to angel investors, venture capitalists will usually only show interest in a company that is already somewhat established, and poses little risk.

While an angel investor can help to get your business off the ground, startup funding from a venture capitalist can potentially catapult your company into new territory.

Alternative sources of funding

Finding funding for a new business doesn’t always mean exploring traditional sources, and it’s important to consider alternative avenues other than startup loans, grants, and trading equity. We’ve highlighted how to finance a new business by thinking outside the box.

Startup funding from friends and family

The fortunate thing about friends and family is that they’ll usually see the best in you and your endeavours. So, why not approach them to help you get your business off the ground?

Instead of trying to expand your brand from nothing, with limited resources, talk to those around you about potential startup loans. We’ve outlined the benefits to you:

  • Loved ones are much more likely to offer startup funding to support your dream, without question. Additionally, more-often-than-not, they’ll lend you money with low or no interest.
  • Because you have a pre-existing relationship, friends and family are less inclined than banks or investors to keep close tabs on their startup loans. This allows you to focus your attention on the running of your business, and gives you the freedom to build without pressure.
  • Accepting a loan to start a new business from a loved one gives you more incentive to succeed. As well as the money, your pride will drive you to develop and grow.

However, taking funding for a new business from a friend or family member should also be treated with caution - most importantly, don’t take your loved ones for granted. Remember that they’re believing in you, likely unconditionally, so establish a prompt repayment plan as a sign of good will. If not, you could lose a friend.

Bootstrapping: there’s no need for new business grants and loans

Bootstrapping is a term used in business to reference a company that grows through personal savings and organic sales. If you’re considering taking this path, rather than seeking out startup loans for new business, it might be worth sticking with the day job until you achieve sustainability.

While bootstrapping can be energy and time consuming, it does come with considerable benefits:

  • Because you haven’t exchanged equity for startup funding, any profit made is entirely yours. Similarly, as you didn’t seek new business loans, you’re not in any debt.
  • Bootstrapping takes a certain commitment, which proves to potential future investors that you’re completely devoted to your venture.
  • While it’s often true that startup loans and investor involvement help to speed up your progress, they come with added pressure. On the contrary, bootstrapping allows you to go about your business pressure-free.
  • Success often feels much more rewarding when it’s self-funded.
  • Spending your own savings will throw you straight into the deep end when it comes to business management, but you’ll quickly develop into the role.

Consider crowdfunding to boost your finances

Crowdfunding is becoming increasingly popular as a means of startup funding, as more businesses have access to platforms. Essentially, crowdfunding allows a new business owner to promote their company to a broad group of interested individuals. As with any investment, crowdfunding comes in a few forms:

  • Equity crowdfunding

Equity crowdfunding is similar to traditional investment, in that individuals will pledge a small sum of money as funding for a new business. This gives the investor a percentage of your company.

  • Donation crowdfunding

Starting a donation crowdfunding campaign is similar to applying for new business grants, in that you aren’t obliged to pay back any investment. These startup funding promotions are usually community-led and focused on raising funds locally.

  • Rewards crowdfunding

Rewards crowdfunding offers incentives for investment. Unlike equity crowdfunding, though, the reward isn’t a share of your company. Instead, the benefits are set according to different amounts; the more an individual invests, the greater the reward.

Crowd funding for a new business may be low to no risk, for you and your investors, but, because of its ever-increasing popularity, it’s never been more important for you to know how to sell yourself. The best way to learn how to finance a new business through crowdfunding is to give it a go; there are several platforms to explore, including:

Trade equity or services for cost-free growth

Trading services and skills with other professionals doesn’t strictly come under the ‘how to get funding for a new business’ banner, but it can save you cash – which can be just as valuable!

Keep an eye out for skilled professionals in your area who could be placed to help elevate your business, in exchange for your respective expertise. Think laterally, such as taking the opportunity to expand your marketing material or accepting financial or legal advice. Get chatting amongst your friends and day-job colleagues, and you’ll be surprised how many people might be able to help you out.
From startup loans and new business grants to crowdfunding and bootstrapping, there are various ways to find funding for a new business. Now you’ve established how to get your business off the ground, discover the next steps in building your brand, and make sure you register your domain name.