When you’re starting a business you need many different things: tenacity, entrepreneurship, marketing know-how and a product or service that adds value, just to name a few. But above all else, you need money. Without the right funding, it doesn’t matter how good your product is, you won’t get anywhere.
What do you need startup business funding for?
It’s important to be savvy from the start. Before you even consider where funding will come from, you need insight into what needs funding and what doesn’t.
Some things you can navigate in the early days without dipping your hand into your pocket. For example, you’ll quickly discover that promotional and story videos are a captivating way to convey your message. Creating these might come with a cost, but there are also free tools like Climpchamp. They even offer excellent free guidance, such as how to plan and create your own sales pitch video.
However, your business isn’t going to get far if the entirety of your marketing budget is made up of the loose change from the back of your sofa. Or you’re not going to develop secure working IT models without accessible visual IT support. You will need funding.
What’s important is to determine what needs financial resources, and what can be managed through grit, effort and time.
How to get startup business funding?
There are so many different options for startup business funding. Broadly speaking, they fall into two camps: equity-based financing and loans. With the first, you will effectively be giving up a share of your company in return for some money. With a loan, you retain control and get more choice, but you need to pay it back.
Loans can be particularly beneficial in the earliest days as you’re less likely to feel pressured to give away precious chunks of your business out of desperation. Later, when you’ve got a surer footing, then investors can be a good route and you’ll have better negotiating power.
Startup loans are also really important in an underrated area: they help you develop credit. It’s very common, on the trajectory to growth, to at some point need a hefty injection of cash to realise on an opportunity (e.g. to buy some new equipment). Having previously serviced a loan will ensure you’re an attractive prospect when you need it.
So, let’s dive in and explore your main options when it comes to choosing your startup business funding for your SMB.
Startup business funding choices
This is an overview of the 10 main types of funding you could choose, along with pros and cons for each.
1. Friends and family
We’ll start here as this is often where entrepreneurs turn. It’s attractive to do so because these people are likely to be your biggest fans after all, and the terms are likely to be favourable.
- It might be interest free and you won’t have official debt.
- You can possibly get away with a ‘good idea’ without a detailed business plan.
- It’s fast.
- The fallout if you default on repayment can be catastrophic for relationships.
- Boundaries can get blurred, especially if they want to get involved.
- You’re limited to the wealth and willingness of who you know.
2. Business bank loan
A business bank loan is a classic loan from a bank, either the old high-street stalwarts, or an online challenger like Uncapped. These loans work by offering you x amount of money paid back over a term with interest added. They are most usually secured (meaning you have to offer security by way of an asset), or unsecured (unlikely).
- Easily understood access to funding.
- Reasonably easy access to large sums.
- You can often pick the repayment term.
- You know what you’re paying back thanks to fixed rates.
- You’ll typically have to offer up collateral e.g. your house.
- You’ll need to showcase a ‘winning’ business plan.
3. Angel investors
Floating about in the business world are wealthy individuals looking for startups to support. The basic premise is that they give you a chunk of cash in return for them having a share in your brilliant business idea (which they believe will give them a good return in the long run). These individuals are typically successful entrepreneurs and can therefore bring expertise and guidance to the table too.
- No repayments stinging you every month.
- You can ask for more quite easily.
- You might get the expert on board who really makes your business take off.
- You’re indebted and may be strong-armed into certain ‘guidance’.
- You have to let go of some control.
- You no longer 100% own your business.
4. Government startup loans
In theUK, the government offers startup loans through the Start Up Loans Company. Brits are famed as a nation of budding businesses and entrepreneurs. The government likes to support this and as such you can borrow up to £25,000 with a fixed rate of 6%. Technically, this is a personal loan. So if there’s more than one of you going into business together, you can each apply, up to a max of £100k.
- Fixed rate with no assets needed to secure the loan.
- You get a year of mentoring included.
- The loan amounts are relatively small, especially for individuals.
Bear in mind that you can also get personal loans from high street and challenger banks which you can use for your SMB. These are great if you don’t yet have any business to show for your ability to repay, but can’t get started without some money.
You can also get short-term (payday) loans. This can be a fast way of getting money but will come with dangerously high interest rates.
5. Venture capitalists
Venture capitalists (VCs) are the next step up from an angel investor and can be suitable if you need seriously large amounts of money to get your business off the ground. They take equity in the business in exchange. Their modus operandi is to get your business to grow super quickly so that they can cash in on behalf of their investors.
- If you’ve got high growth potential you’ll be able to get the big bucks.
- VCs usually offer valuable expertise and open networks.
- You have to hand over a large chunk of the business, and, with it, control.
Turn your attention to the general public and, you may be able to raise money from people who simply think you have a great idea and want to be in on the action. It can take time and effort, and you need to be able to show that you’ve got excellent growth potential. And you’ve got to be seriously good with your pitch (make that video!). There are lots of different types of crowdfunding, don’t think it’s all about no-strings-attached donations.
- You can reach lots of people.
- Those people might also become customers.
- Your marketing efforts needed will help your business overall.
- It’s probably the most labour-intensive way of raising funds.
- There are no guarantees you’ll get what you need.
7. Equipment financing
If your business depends on expensive machinery or equipment then chances are that’s where most of your money goes. In this instance, equipment financing may help. These are loans with repayment terms.
- No collateral needed, just the equipment.
- You own the equipment, you aren’t leasing it.
- You have to use the loan for the exact equipment it’s for.
- Rates are often high.
- You still have to pay for equipment maintenance, unlike with leasing.
8. Business grants
Grants can take a bit of digging to find one suitable for your business but there are lots of different providers that may have something suitable you can apply for.
- No repayment: you apply, you get.
- You may get some help and support as well as money.
- Applying can be hard, time-consuming and all for nothing if you don’t succeed.
- There could be restrictions on how you can spend the grant.
You can also apply for government backed Research and Development Grants if you’re up to something particularly innovative. You may get direct funding, or see your tax liability reduced.
9. Business credit cards
Simple to get and use, they are typically a way of short-term borrowing against company income best for managing cash flow, rather than much else.
- Often come with various perks.
- May have a 0% interest period.
- Immediate access to funds.
- You may not be eligible.
- Pay back quickly or rack up painful interest.
- Banking fees.
10. Incubators and accelerators
Particularly great for tech startups and other disruptors, being part of an incubator or accelerator scheme can deliver seed investment in return for some equity.
- Typically come with structured training.
- On-hand and relevant expertise.
- Strength of industry giants behind you and access to their networks.
- Expect gruelling Dragon’s Den style selection processes.
- There will be various conditions you have to comply with.
What’s the best way to fund my business?
There is no risk-free way of sourcing funds for your business. Whether it’s jeopardising a family relationship, risking inability to pay back a loan, or handing over part of your business to someone who turns out to have bad ideas, there’s risk involved. It’s why it’s important to consider every option and weigh up the pros and cons of them all.
Generally speaking, in the early days, a loan is often the best solution as it gives you the freedom to control the direction of your business and everything is clear and straightforward – you know what you’re paying back, when and how. It’s worth exploring different loan options and steering clear of the high costs associated with high street banks. Challenger options, such as Uncapped, which linked repayment to revenue share, can be a more cost-effective and flexible way of securing startup business funding.
Top tips for securing startup business funding with a loan
- Have a plan for how you’ll pay the lender back.
- Have a snazzy figures-focused business plan.
- Clearly know why you need the money and how you’ll get returns on spending it.
- Get your personal finances in order.
- Show you’re worthy of investing in, by letting your investors know that you have a solid and connected hybrid team, who are focused on achieving the goals and objectives of the organization.
- Be honest with yourself about the financial health of your business and its prospects.
- Work on business stability.
- Do your homework and choose a loan with high-chances of acceptance and which suits your ability to repay.
- Do the math on payback figures, using more than the headline rates.
- Be honest with lenders.
Navigating startup business funding can be overwhelming. Do your research, do you your sums and align this with the potential of your business.