Starting a business
Starting a new business often requires capital – money that is used to help research your business idea, create a prototype product, or purchase equipment or machinery that your new business will use.
Starting a new venture can be thrilling – yet also financially challenging for new business owners.
Often, the first hurdle that budding entrepreneurs face is securing the necessary funds to breathe life into their business dream.
There are many reasons a start-up requires initial funding, such as:
Research and development
Understanding the market and potential customers is important. Funding can be used for conducting market studies, surveys, and tests that offer insights into the viability of your business idea.
Prototyping
For product-based businesses, creating an initial version or prototype can require significant resources, from materials to machinery or even software development tools.
Inventory and stock
Retailers and manufacturers might need initial capital to purchase stock or raw materials, ensuring they’re ready to meet customer demand.
Operational expenses
Rent for a physical location, utilities, initial salaries for essential staff, and setting up a functional workspace can require a substantial upfront investment.
Marketing and branding
Building awareness can be important for any new business, such as funding marketing campaigns, creating a brand identity, and establishing an online presence.
Licences and insurance
Complying with regulations can mean securing certain licenses or buying required insurance, such as food safety or public liability insurance.
Contingency
a financial safety net can be invaluable during unforeseen challenges when starting up to ensure that you don’t run out of cash.
Many new business owners use their personal savings or money provided by friends or family.
You might also investigate additional sources of funding, and this is generally known as pre-seed capital.
Pre-seed capital
Pre-seed capital is the earliest stage of funding needed to start a business.
It is provided to business owners looking to expand on an initial business idea or concept.
It is often used for activities such as conducting market research and creating prototypes or Minimum Viable Products (MVPs).
Pre-seed funding often comes from a business owner’s personal savings as well as from friends or family members.
There are different sources of pre-seed capital that you can explore when seeking funding for your start-up business, including angel investment, business loans and crowdfunding.
Angel Investment
Business Loans
Crowdfunding
Start Up Loan
This is a government-backed, low interest personal loan to help start or grow a business.
Eligible UK-based founders starting a new business or those trading for no more than 36 months can borrow up to £25,000, with a fixed interest rate of 6% per annum. Successful applicants also receive 12 months of free mentoring.
Business owners who have already secured a Start Up Loan and have been trading for no more than five years may be eligible for a second loan.
Find out more about a Start Up Loan.
Debt finance
This involves a business borrowing an amount of money or purchasing an asset with finance that is paid back with interest over an agreed period of time.
Common forms of debt finance include:
Loans
Business loans are usually offered by a range of providers – from high street banks to specialist business lenders – and may be secured or unsecured.
- Secured loans use assets your business owns – such as property or machinery and stock as security.
- Unsecured loans can be borrowed without using any assets as security. As a result, unsecured loans typically have higher interest rates than secured loans as they are more risky than secured lending.
Lenders typically look for businesses with a trading history and a proven track record.
This means that early-stage startups may struggle to get a loan.
If that’s the case a founder may want to consider a Start Up Loan which can cater to those who have been turned down for finance elsewhere.
There are also some lenders, such as Community Development Finance Institutions (CDFIs), that consider applications from businesses with limited assets, trading histories or track records.
Find out more about business loans.
Overdrafts
An overdraft is a line of credit on your business bank account that provides access to more short term funding than your business’ own capital.
Unlike loans which have a fixed repayment fee, you only pay interest on the amount you’re overdrawn.
However, the bank will usually charge a fee for arranging the overdraft, and if you’re late or miss a repayment, you’ll be charged a fee that could affect your credit rating.
Overdrafts generally have a higher interest rate than business loans.
Find out more about overdrafts.
Equity finance
Angel investment
Angel investors are often established entrepreneurs or people with extensive business experience who use their own money in exchange for an equity stake in your business.
This means that in exchange for investing their money in your startup, they will own a percentage of your business.
As well as funding, angel investors can provide valuable business guidance and access to a network of connections that may also prove very valuable.
However, an angel investor could also want some input into the business’s decision-making, which can compromise a founder’s autonomy and possibly lead to conflicting ideas for getting the business off the ground.
The Seed Enterprise Investment Scheme (SEIS) offers tax relief incentives to angel investors to encourage investing in smaller businesses.
See our checklist of the steps you might want to consider in order to prepare your business for angel investment and learn more about angel investors and their potential benefits for your start-up.
Equity crowdfunding
This involves listing your business on an online platform that allows investors and members of the public to buy shares in your business.
There are various equity crowdfunding platforms.
They allow you to reach people who might otherwise not have known about your business, but there’s no guarantee of success and platforms often charge a success and listing fee.
The Enterprise Investment Scheme and Seed Enterprise Investment Scheme (SEIS) offer tax relief incentives to crowdfunding investors.
Find out more about equity crowdfunding.
Mezzanine finance
This is a hybrid form of funding that blends debt and equity finance.
A funder offers a business a loan which the business agrees to repay with interest.
However, should the business be unable to meet the repayments, the debt could be converted into shares in the company.
British Business Bank plc is a development bank wholly owned by HM Government. British Business Bank plc and its subsidiaries are not banking institutions and do not operate as such. They are not authorised or regulated by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA). A complete legal structure chart for the group can be found at british-business-bank.co.uk.
Whilst we make reasonable efforts to keep the information in this guide up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.
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Worth knowing
Start Up Loans offers a government-backed low interest personal loan of up to £25,000 to help founders start or grow a business.
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