Funding your Business Guide

Funding your Business Guide

Introduction The biggest barrier people face to starting their business is how to get the capital. That injection of funds is essential if you need to purchase equipment, materials or fund your initial operating costs such as phone, fuel and software licences. If you have started your business plan you will have covered this in your financial forecast. Some people have an idealistic plan of what equipment they want and whilst that ‘branded’ tool may be the best in the market, if you are struggling to raise the capital for it, consider alternative options. Unless it’s a grant, in all cases that money must be repaid and will come from the bottom line. Cashflow is crucial at the start of a business so be mindful of your planned purchases. Be brutal with this process as it could save you thousands of pounds. Prioritise what you need and do without until the business gets growing. In this guide we will set out the common ways individuals raise funds for their business.

Around 35% of women didn’t start their business due to insufficient funds. *

* source www.money.co.uk/business/business-statistics

You may well have to consider support from a partner or other paid work. If you look after the pennies, the pounds will look after themselves is the adage that makes sense here. You will also have greater control over the finances, reduced worry about paying back loans or having an equity partner in the business. Family and Friends Your personal network can also fund your business with potentially favourable terms. This may be an interest free loan, a gift or an investment with some equity in the business. You need to be clear what the relationship is, the terms of the agreement and have this in writing. They may want to see your business plan and understand what you are going to put in to get started. Generally, loans from family can be at low or zero interest, have flexible payment schedules, with options to increase or pay back the funds without penalties and no credit check required! The downside arrives if you fail to repay on time or they suddenly need the funds back or the relationship becomes damaged in some way. That can create friction and difficultly at a time when your business needs stability and investment.

Tips Here are some questions to ask yourself about your investment needs. What is the least amount you need to get started? What could you borrow or lend rather than purchase? What could you buy cheaply or second hand? What can you do yourself rather than pay someone else? Do you really need that serviced office? Bootstrapping Using your own savings or income to start a business is a sensible way to get moving. This capital may come from savings or earnings from a current job. You could also add any profits from early sales to fund your operations and to avoid any form of borrowing. Businesses that grow this way are mindful of their operating costs and usually focus on essential expenditures. This is a very lean way to grow your business and generally growth happens organically. You would add products or services as the business allows. Taking as little profit as you can out of the business means you will have to work on that survival budget.

Crowdsourcing If you can’t fund from friends or family, then consider crowdsourcing from the public. Lots of people already use platforms for raising money for charitable causes or asking for personal or community needs such as health, education, the arts and sports. By taking advantage of sites such as Kickstarter, Crowdfunder or Gogetfunding, you could put your service or product before a potential market audience. If you can align your business with a personal need you could also look at sites such as GoFundMe or Just Giving. These platforms work in different ways so it will be worth doing your research. Some allow you to offer rewards, take donations for your idea or need, get lending (see below) or offer equity in your business. For the non-equity options this can be a good way to get debt free funding, keep ownership of your business, grow a customer base and test the market for interest in your product.

Tips to Lending from Family • Pitch as though they were an investor, bank or lender. • Decide if this is an investment, a loan or a gift. • Have the terms in writing including the amount, interest, repayment schedule or security offered. • Make your payments on time and consider setting up a standing order so payments aren’t missed. • Keep them updated with the developments of the business so they journey with you. • Be honest if you are struggling to repay before your next payment. By looking to friends and family you can not only bring necessary finance to your business but also emotional support and encouragement from stakeholders who want to see you succeed. You may not get high levels of funding that a bank may offer but like bootstrapping could save yourself some cost at a crucial stage of your business.

Tips on Crowdsourcing • Select a platform you want to use that suits your target audience and goals. • Be realistic about the amount you want to raise. Some platforms allow you to keep what you raise others will only release funds once you have reached your target. • Decide if you want to give equity or rewards and what that looks like to your audience. • Develop your pitch for your donors or investors using eye catching video or animation. • Don’t assume your listing will just generate funders. You will need to have a marketing strategy to reach out to interested parties to generate interest and encourage investment. Peer to Peer Lending (P2P)

platform where investors can lend to borrowers through an online marketplace. Lenders can spread their risks across different loans and borrowers can get more favourable terms, access to cash quicker and better interest rates. Some of the big names in P2P lending platforms are RateSetter, Easy Money and Funding Circle. You still need to have a good credit history and often will need some means to repay such as a salary from a job. As a business they may want some asset as security for their loans. Grant Funding There are a range of potential grants you could consider. These grants are non-repayable funds but will come with some conditions on application. Grants are paid by the government, local councils, or private organisations towards areas such as innovation, R&D, export, job creation or energy related areas such as reducing your carbon footprint. The way grants are funded can also vary. In some cases, the fund can be released on acceptable application, may require you to match fund, or spend your own funds and be reimbursed after.

Peer to Peer lending offers you a means to borrow funds without having to go direct to a bank. These sites offer a

• Complete your business plan as this may well be required as part of your submission. • Write a compelling proposal for the grant including how your application meets their criteria. • Submit within their required deadlines and be patient. Don’t rely exclusively on a business grant to come through as the competition can be fierce, consider other methods to raise funds particularly if your need is urgent. Grant funding can take time and any grant funder may require further information or want to make a site visit to review your proposal. Some grants may tie you into mentoring arrangement or request reporting on outcomes so you will need to consider the administration of this if you are successful. Make sure you are well connected with local business networks such as the Chamber of Commerce or Federation of Small Business or your own professional association. Your network and contacts may well advise on additional grants you may not have considered.

Grants can be sector specific, regional and may relate to start ups or businesses that need funding for expansion. You can find out more about the various grants using the governments portal www.gov.uk/business-finance-support. You can also contact your local Enterprise Partnership (LEP). Your LEP can provide you with advice and support around your business and any grants they may have in your area. www.lepnetwork.net. Some local authorities, employment programmes and housing associations may provide small grants for training and equipment if you meet their criteria. The Princes Trust also offers grants to start ups for young people aged 18 to 30. You could contact your local enterprise advisor at your council to see if there are any grants at town, city or district level. Tips • Align your application to grants that meet your business type, industry and location. • Check their eligibility criteria carefully so you don’t waste time making an application that may be refused.

Some Search Links swoopfunding.com/uk/business-grants smallbusiness.co.uk/small-business-grants-uk-2548113 grantsonline.org.uk/news/business-development princes-trust.org.uk/how-we-can-help/support- starting-business Government’s Start Up Loan Scheme The British Business Bank has a start up loan scheme where individuals can borrow between £500 and £25,000 of startup investment. This is a fixed rate of loan of currently at 6% based on 1 to 5 years repayment with no administration or set up fees. On successful application owners are partnered with a mentor for additional support. This is an unsecured personal loan and comes with the standard credit checks. The assessment of the loan will also look at the viability of the business to pay back the funds and will want to review your personal survival budget as part of the application. You don’t have to take all

the loan in one go. (You can tranche it, meaning borrow some now and get the rest later). If you are successful and repay it you maybe eligible for a second loan. The loan offers very favourable terms of interest rate for new businesses, but the scheme does require a good business plan to be successful.

For more information on the scheme go to www.startuploans.co.uk

The scheme is popular.

105,983 Businesses backed so far

£1.014bn Money lent so far

£9,950 Average loan size

30 Businesses backed per day

Personal Loans Peer to Peer Lending sites and the Government Start Up scheme all offer loans against your personal credit. There are plenty of

other platforms where you could look at personal loans. You could take out a personal loan for the purchase of a vehicle which could then in part be used for business travel. However, banks and lenders want to know what the reason for the loan is. So, if it’s for your business then you need to apply for a loan for that reason. Generally personal loans for businesses are set at a maximum of £30,000. A wide range of lenders will offer you suitable terms and rates, but these may be higher than business loans set out below. Applying for a personal loan for your business may be a quicker process than applying for a business loan and if your credit is good, could be deposited to you relatively quickly. The downside is that unlike a business loan, personal loans don’t come with additional support. www.merchantsavvy.co.uk/business-loans/unsecured business-loans www.oceanfinance.co.uk/loans/self-employed-loans Business Loans There are a wide range of financial institutions that will offer you some form of loan agreement to start your business.

Loans can range from £5,000 to £250,000 and higher. Some loans may require you to have been trading for a period or have turnover exceeding a certain amount. Loans can be unsecured or secured against some asset of the business. There are plenty of compare the market sites where you can look at various terms and rates. If you are a small business and do not have much trading history, you may prefer a personal loan such as the government scheme on page six. A business loan will get you a lot more money than a personal loan and can build credit history for your business. When deciding on a lender consider the rates, fees, early repayment penalties, lending limits, services offered and additional support for your business. Companies that offer such arrangements included Cube Funder, Funding Circle and Funding Options. Links www.money.co.uk/business-loans/start-up-business-loan www.fundingoptions.com/business-loan-calculator/ Equity Financing Giving up equity in your business to an angel investor may not be everyone’s cup of tea but it could be a sure way to

www.angelsden.com www.minerva.uk.net www.growthbusiness.co.uk/20-angel-investor-networks-you should-know-about-2557925 Business Partnerships Offering equity to an investor is normally done by forming a company. However, there are other ways to get equity into your business through the partnership structure. In our business structure guide we discuss general partnerships where you could go into business with one or more partners. This way you could get investment but also share in the profits with other individuals. Alternatively, you could enter into a limited liability partnership where one partner invests but does not manage the day-to-day operations.

accelerate your business growth and obtain the investment you need. Anyone who has watched the Dragon’s Den series will understand what investors can bring and what stake they may want in the business. Many investors have a lot of expertise in the sector and may be more relaxed about when they want returns from the business. In equity you are giving investors shares in the business from which they will want dividends at the end of the year if your business makes a profit. You may have the overall control of the business but investors will want to have their impact at general meetings on the business direction so you could lose autonomy and privacy in your decisions. They will also have high expectations on the business, and this could add pressure for you to achieve the targets set out for their investment. Finding the right investor can take time, require you to pitch, consider the various offers, review and seek legal advice before you decide if the relationship is right. Sample Angel Investor Platforms www.crowdcube.com

www.angelinvestmentnetwork.co.uk www.advantagebusinessangels.co.uk

Other forms of Financing

credit. The interest rates tend to follow the bank of England base rate plus commission for the bank. The overdraft fees are only charged as you need to dip into the account. There is usually an arrangement fee to set up the overdraft. Credit Cards Eligible customers may get company credit cards. These tend to be higher rates of interest than overdrafts but can offer immediate borrowing solutions. Some of the best ones offer a 56-day interest free period as well as cash back, flexible credit and zero ATM fees. The downsides may be high spending to gain points and annual administration fee for the card. Merchant Financing This is a cash advance repaid through the credit and debit card sales transactions of a company. This is often used by retail, hospitality and leisure businesses that have high number of transactions. The advantage is that business repays directly to the loan company via a small fee direct from their sales. The percentage rate is called a factor rate and can be as low as 7% to as high as 35% depending on the business.

There are lots of different forms of financing and we have summarised some of them here. Invoice Financing A company loans you some money against your expected invoice using the invoice as security. There are two types, the loan format where you still collect your invoices but pay interest to the loan company. In invoicing factoring a company buys your invoice and pays between 75% and 95% of its value. The invoice company then takes on collecting that invoice. Instant VAT Refunds A finance company administrates your VAT returns releasing cash immediately for a commission then collects the money directly from HMRC. You obtain the cash in your bank more quickly than a normal return from HMRC. Bank Overdrafts Some business bank accounts offer overdrafts to eligible customers. This is often used for short term advances of

Leasing or Hire Purchase Leasing allows a company to hire an asset based on the arranged lease. At the end of the period the equipment is returned or in the case of hire purchase, the balance left on the item has the option to be paid at which the item is owned by the company. What Next? The information supplied here should only be considered as advisory around the different ways you can fund your business. We recommend you get expert financial advice or talk further with your bank or accountant to decide what forms of financing is going to be right for your business. All forms of borrowing carry risks and you will need to explore how raising the funds will be repaid as well as enable you to launch your products or services. Getting this right could offer a major foundation to your business growth. Getting it wrong could saddle you with crippling debts so explore this wisely.

Need More Advice? Contact Clarion Business Support Unit for more advice: bsu@clarionhg.com

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Copyright © CGC 2023