Startup founders in the UK have raised concerns that access to funding is proving difficult as prospective lenders are becoming frugal with their finances. All businesses are facing challenges with escalating costs and an unstable economy but startups are not as robust as established companies and are more susceptible to the effects of the recession. This is alarming because a lack of funding is the primary reason why startups fail, accounting for almost 50% of closures in the UK.
With that in mind it is important as a startup owner that you explore every available avenue for raising funds. Here we outline the various funding options available including the pros and cons of each one.
Friends and family
This is usually the first option that startup owners turn to in their quest to run their own business. The fact that most friends and relatives will believe in your ability and your business make this a great launch pad for a startup. No stress from pitching your business plan to strangers in suits, just a relaxed, informal chat at home. Obtaining funding this way is quicker and you also get to keep complete control of your business. On the downside there could be a harmful effect on any relationships should the venture fail.
Crowdfunding is innovative and one of the most popular ways of raising finance for startups. By using a crowdfunding platform you can launch your fundraising campaign and raise money from the general public. There are different types, with the most popular being peer-to-peer, equity and rewards crowdfunding. This alternative method of raising funds can be time consuming so bear this in mind.
Crowdfunding can be a great way of growing a community around your product or service. Through using the power of an online community, you can gain valuable information about your market and reach prospective customers. Some platforms operate an all-or-nothing model, which means unless you reach your target you won’t get any capital and everyone gets their money back.
Banks are a major source of funding for new businesses whether that is through loans or overdrafts. Most banks provide small business loans to facilitate growth. Terms will usually vary between one and ten years and because you’ll know what your monthly repayments are you can budget accordingly. With such a competitive marketplace it is important that you shop around on the various types of loans, interest rates and terms to ensure they match your needs.
A business overdraft may be worth considering, as long as you can present a good business case and having a good relationship with your bank always helps. Remember that having an overdraft may affect your credit score. An advantage of choosing this option is that you will not be giving up any equity, so you retain full control of your business. The trouble with sourcing finance from a bank is that it can be a long drawn-out affair and not suitable when you need funds quickly.
These are wealthy independent investors who will provide finance in return for a share of your business. Also known as business angels, they can operate on their own or as part of an investment team. The benefits of using these private investors are that they have a genuine interest in getting involved with the business. They invest their time and use their expert knowledge and experience to act as a mentor and can use their network of connections to help different aspects of the business. The downside to working with an angel investor is that you will lose control of your business, which depending on your circumstances, may or may not bother you.
Venture capitalists typically invest larger sums than angel investors. They provide investment in exchange for equity and look for businesses with the potential for fast growth. Their objective is to make a significant return on their investment in a relatively short period of time. Positives of using venture capitalists include the ability to raise large amounts of capital, experienced leadership and advice is available and no monthly payments are required. Negative aspects of using venture capitalists include the difficulty in obtaining funding and the amount of equity you have to give up. The worst case scenario is where performance measures aren’t met, which could result in you losing your business.
Incubators and accelerators
Business incubators and accelerators provide startups with the support and resources that new businesses have difficulty in accessing. The support given may involve networking, mentors, funding from investors and provision of a co-working space to work alongside other businesses and professionals. Although the application process can be demanding, they do provide new business owners with much needed training and expertise.
Small businesses can apply for funding through guaranteed loan schemes. The Enterprise Finance Guarantee (EFG) is one such example. The British Business Bank introduced the government backed EFG specifically to help small businesses develop by guaranteeing loans of between £25,000 and £1.2 million. This type of funding is often explored by businesses who have been unsuccessful with more mainstream lending. A positive aspect of a guaranteed loan scheme is that payments can be low for subsidised schemes. However, the criteria to qualify is stringent.
Short term loans
Depending on your circumstances, a short term loan – sometimes referred to as a ’payday loan’ - maybe an option to consider. This type of loan is often used to boost cashflow for a few weeks, to increase working capital or to simply bridge a gap. You must be able to pay back the loan on time or the interest rate can be significant. Make sure you only borrow what you need and shop around to find the most favourable option. An advantage of this method is that it is easy and quick to access but on the other hand they can be expensive to repay.
Please note that all funding options carry risks that can impact your business. It is important that you carry out extensive research before making a decision.
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