With the economy finally returning to ‘business as usual’, there are more entrepreneurs than ever attempting to take their business to market. There are plenty of great business minds out there with the ideas and skills to build a business, but securing the initial funding required to start a business can be a major roadblock for many.
With the entrepreneurial spirit in mind, we’re looking at some of the most common ways startup businesses can find the initial cash injection they need to set their wheels in motion.
A business loan is one of the most familiar types of funding for many startups, with many organisations specialising in loans specifically for businesses. A loan may be the perfect solution if you need a fixed sum of money to purchase capital to set up your business.
As with all types of finance, you will repay the money borrowed with interest. The great thing about this, though, is that the interest rate is usually fixed and your repayments aren’t tied to the success of your business – unlike investment where your profits could be vastly diminished when investors take their cut. The Government’s startup loan scheme is aimed at encouraging new businesses to take flight, offering anyone over 18 the chance to borrow up to £25k and get their business proposal moving.
As with all forms of funding, a loan has its disadvantages too. Loans involve fixed monthly repayments, which can put the pressure on if you’re struggling to pay your bills – potentially resulting in assets being repossessed if you fail to do so.
A variety of grants are available from the government, councils and various other organisations – offering the ultimate solution for cash strapped entrepreneurs with a burning business opportunity.
Aimed at encouraging people to start their own business, these incentives are highly sought-after sources of funding. Grants offer the ultimate funding solution, with no obligation to pay the money back and no loss of control over your business.
Unfortunately, getting a grant is more difficult than most other methods of funding. After you’ve found a grant that meets your needs, you’ll be required to go through a complex application process and competition can be fierce for these business handouts. This can be a time-consuming process, made more difficult still by the fact that you’ll already be busy planning your future business.
Perhaps one of the more common sources of funding for startups is external investment. Much of the British public will be familiar with this type of business funding, taken into the mainstream by the BBC’s Dragons Den television show.
Bringing an investor on-board does have its benefits. As the investor owns part of your business, it’s in their best interests to help you make it work – and sometimes two businesses minds are better than one. It’s also worth remembering that you won’t be paying any interest, or repaying a loan as such – which is a good enough reason to seek investment alone!
However, many entrepreneurs are reluctant to give up part of their company at such an early stage. Businesses owners may also have to seek the approval of their investors when making any business decisions, therefore limiting the freedom of the director.
Borrowing money from family and friends is commonplace in the world of startups, whether it’s a small amount to cover an unplanned cost or a significant sum of savings to temporarily bankroll your business.
With very little in the way of regulation, this form of funding tends to offer a more flexible means of lending. And depending on who you’re borrowing from, they may not even charge you interest on your loan.
Unfortunately, that’s where the benefits end. Due to the lack of contracts and regulation, things can take a turn south very quickly. Lending money from friends and family can put a strain on your relationship and verbal agreements can easily be misconstrued. In order to give yourself more protection, ensure you formally document and sign the business agreement between yourself and the lender.
Crowdfunding is quickly gaining popularity as a legitimate source of startup cash, particularly with the latest generation of entrepreneurs. Essentially relying on a large number of small investments or donations to collectively fund a business, crowdfunding sites like Kickstarter are taking the small business world by storm.
Money can come from donations, microloans or small investments – so crowdfunding can vary a huge amount in terms of format. It’s a great way to build a brand before your business has even started, as your business proposal will be seen by thousands. With donation style crowdfunding, you’re essentially being given the money for free with no ties to investors or repayments to make.
There are, however, a few negatives to this type of funding. In order to raise donations for your business idea, you’re putting your unprotected idea on the public domain. If your idea isn’t protected by copyright, there’s nothing stopping a competitor from using it. Crowdfunding also lacks the regulation and protection offered by other sources of finance.
Once You’ve Secured Your Funding, What’s Next?
Starting a new business can be a busy and stressful time. Give yourself financial peace of mind by hiring an accountant to ensure your finances are in order.
At Insight Accountancy we’re experts in small business accounting and can help you streamline your expenses, ensuring legal compliance and giving you peace of mind that your money is being managed by a professional. From handling your payroll and PAYE to ensuring you only pay the tax you owe, we offer a comprehensive accounting service from our office in Newcastle upon Tyne. If you need of an accountant for your business, don’t hesitate to get in touch.
Image source: William Warby