A Guide to Funding your Small Business or Startup

27th March 2019

Startups are built on amazing ideas, but turning those ideas into reality will always require some form of financial backing. This can be one of the biggest challenges for a brand new business.

Here’s our essential guide to help entrepreneurs and startups with bright ideas find the funding they need.

It all starts with a great business plan

There are two things you need to do before you approach any potential lender. The first is to create a solid business plan, and you should do this before doing anything else.

Firstly, a business plan sets out how you will establish and run the business. It does the following:

  • Outlines how the business will be staffed
  • Describes in detail how it will bring in revenue
  • Lists likely expenses andhow cash flow will be managed
  • Calculates likely profit margins
  • Clarifies the management strategy
  • Expresses the vision for the business
  • Identifies potential roadblocks and how they can be overcome
  • Sets out a plan for the next few years

This is extremely helpful for you as you start your business, but it’s also of great interest to lenders. They want to see that you’re not only a dreamer with exciting ideas, but a sensible business manager who has done their research and put the work into drafting a comprehensive and realistic plan.

The most important parts of this document for a potential lender are the projected income and outgoings streams. These demonstrate that the business will be financially viable, as well as setting out a timescale for bringing in revenue and profits. With this information, a lender may consider you a safer bet and be more comfortable lending to you.

The second important thing to do before you start searching the market for potential lenders is to ascertain how much you need to borrow. You need a concrete figure forhow much you need to borrow, with detailed information on how the money will be spent.

You can start your business in stages, with pockets of funding to support each one. If you’re looking to reduce risk and establish a solid foundation for your business, this could be a sensible way to get started. This should all be laid out in detail in your business plan, with justification for every penny you want to borrow.

Funding options

There are many routes you can go down as a startup or small business looking for funding. There are so many choices, in fact, that it can be a little overwhelming. Let’s look at a few of the most popular:

  • Bank loans. Most banks offer loans for businesses, as well as specialist packages to support startups. Provided you compare the market for competitive rates, you can find quite low interest rates. You’ll need a well-researched business plan and a good credit score to get approved, although it helps to have a good relationship with the bank. Bank loans can take some time to process, so be patient.
  • Short-term loans. This is a quick but expensive way of funding a small business or startup. It involves lending a small to medium amount of money to kickstart your project, paying it back within a matter of months. This injection of cash can also be useful for bridging a funding gap, boosting cashflow or working capital. An important point to remember is that these loans come with very high interest rates and can be very costly if you don’t pay on time, so be aware of the risks before you go ahead.
  • Angel investors. This is an investor (usually a wealthy businessperson) who provides funding in exchange for a share in the business. This share is usually less than a venture capitalist would demand, but so is the funding available. Crucially, you may also benefit from advice and guidance from an experienced businessperson. You will need to sacrifice some control over the business though.
  • Venture capitalists. These are investors that tend to put a large amount of cash into a new or developing business in exchange for equity. If you believe you have something with high growth potential and you’re fine to give away quite a lot of equity, this could be a suitable option.
  • Government start-up loans. The UK government can provideloans of between £500 and £25,000 for new businesses. These are unsecured personal loans, unlike bank loans, and you will need to jump through quite a few hoops to demonstrate eligibility. It can be well worth it though, as the money comes with support, guidance and up to 12 months free mentoring.
  • Friends and family. Asking friends or family for a loan can be a quick and low to no-risk way to get your business off the ground. However, you should be aware of the very real risk of damaging your relationship with the person, especially if the business fails or there is confusion or miscommunication over repayment terms. You may find that friends or family, might want a stake in the business or some kind of kickback for the loan. Generally, we don’t recommend this approach.
  • Grants and incubator investment. It’s well worth checking with your local authority, the government, local universities and business hubs to see if there are any grants you could be eligible for.If your business is investing in research and development, then you could be eligible for an R&D grant which will come in the form of a cash investment or a significant tax reduction.

It’s important to choose the type of funding and the lender/investor that suits your business. For example, a venture capitalist is not very likely to be interested in funding a small startup with no track record in the industry. However, banks are likely to offer products geared specifically for startups.

Have you considered crowdfunding?

An unconventional method of fundraising for new businesses that has leapt in popularity over the last few years is crowdfunding. This is where you launch a campaign on a crowdfunding platform and offer participants rewards for pledging money. Usually, the project is only funded if the stated total (your funding goal) is reached, but there are different options available.

Crowdfunding can be time-consuming and stressful, and it isn’t suitable for all kinds of businesses. However, those that are customer-facing or that have products to offer may find it a good way of securing an upfront cash injection.

For example, a new restaurant can offer meals as rewards, while a business which makes products can promise pledgers the first products off the production line. This is also a great way to engage your first customers, getting them interested and emotionally (as well as financially) invested in the business even at this extremely early stage.

There are risks with crowdfunding, of course. You need to ensure that your business will be able to honour the rewards it promises, so choose the right total for your funding goal or you may not be able to do everything you planned.

How to make yourself more ‘fundable’

There are ways that small businesses and entrepreneurs can make themselves more appealing to potential lenders. The first is to have all your ducks in a row, being prepared and organised with figures and a great business plan. One of the most important things is to demonstrate affordability, that you can comfortably repay what you borrow without putting undue strain on your fledgeling business.

Looking good on paper isn’t everything though. You also need to have a compelling sales pitch up your sleeve, as you’ll need to do a lot of ‘selling’ the business prospect to potential lenders.

Make sure to start the search early, keep your personal finances in order and keep a close eye on your business credit score. If you do your homework and are able to financially justify the funds you need with a reliable business plan, then you should have no problem at all.

Of course, putting together a business plan isn’t straightforward, so you might want to think about enlisting the services of an experienced accountant.