Starting and running your own business is an expensive task, with the initial expenses of getting your business up and running making a big dent in your budget. Getting through the first few years in business can be difficult to manage, and sometimes external financial help is required to help get your business off the ground, to expand with new products, equipment or business premises. In this blog, we will explore 6 different types of company funding, to help you better understand what they are and how they can help your business.
Start Up business loan
Arguably the most popular type of financial support for businesses is a loan, where money borrowed from a lender is repaid over a specified period. Established in 2012, the Start Up business loan is a government backed loan specifically available to currently unestablished or new businesses which have been running less than 36 months (about 3 years).
In addition to being able to borrow between £500 – £25,000, with a repayment period of between 1 and 5 years at a fixed interest rate of 6% per annum, successful applicants can also receive 12 months’ free mentoring. The loan is unsecured which allows you to protect your assets instead of putting them at risk to obtain the loan.
A business advisor will review your application based on 3 factors, your credit score, personal affordability, and the viability of your business before deciding whether to grant the loan. These are all assessed to ensure that you can afford the monthly repayments for the duration of your loan agreement.
Pros
- A fixed interest rate ensures a steady repayment forecast
- Available to businesses that are yet to begin trading or are under 36 months old
- Receive support for the first 12 months to help your business in its early stages
- Unsecured – meaning no assets are at risk
Cons
- Affordability criteria apply before you are granted the loan
- You need a lot of business planning, as business advisors will need to make sure the business idea is viable before investing
- Can only be used to grow a new or existing business, and cannot be used for staff training or repaying company debts
Small business loans
A small business loan is designed to assist well-established small businesses with their operating costs. They can be used for numerous purposes, including purchasing equipment, to help with expansion, or to help cover the cost of training new staff. Depending on whether you select an unsecured loan or a secured loan you may have to secure high value items against the cost of the loan to secure it from the lender. You can borrow between £1000 and £50,000 depending on your needs, turnover and ability to repay the loan. Varying factors such as repayment costs and timeframe and interest rates will vary depending on each company’s individual circumstances and which lender they apply to.
Pros
- You retain full control of your business, unlike other funding methods (see below point 6)
- Amount borrowed and repayment terms can be negotiated in your best interest
- A small business loan can have better interest rates than other types of loan
Cons
- Specific lending requirements need to be met to qualify
- You must repay the full amount plus interest
- If choosing a secure loan, the assets chosen may be repossessed if you default on the repayment agreements
- Can be a lengthy process to receive the funds
Government backed business grants
Like a loan, you can apply for a government backed business grant to increase the capital in your business. Most are aimed at small businesses but can sometimes assist start-ups. Unlike a loan, however, a grant does not need to be repaid, so there are no high interest rate repayments.
With grants of this type, there is no one-size-fits-all approach, and there are over 130 different grants that can be applied for depending on your business activities. The criteria and amount you can borrow vary depending on the individual grant you are applying for. Due to the differing requirements, applying for a business grant is time consuming, and a lot of evidence including highly detailed business plans and paperwork needs to be provided before you will be considered for the grant. It may be difficult for you to find the grant that best applies to your business, so it may take some trial and error.
The government provides details of current finance and support available for businesses and allow you to filter according to the type of support, business stage, industry, number of employees and region.
Pros
- Does not need to be repaid
- Multiple options to choose from
- May make you more eligible for additional grants in the future
Cons
- Can be difficult to receive a grant due to restrictive specifications
- Time consuming as business plans and lots of paperwork are required
- Can only be used to assist with what you specified when applying – no flexibility
Limited company loan
Like a small business loan, a limited company loan is a type of finance only available to limited companies. Unlike an ordinary loan, which is borrowed by the person who owns or runs the business, a limited company loan is borrowed by the company itself, so the liability for repaying this rests on the company and not the officers.
Lenders offering limited company loans usually prefer to lend to well-established businesses who have been in operation for at least 2 years, due to the increased likelihood the company will be able to manage the repayments. Some lenders may ask for a personal guarantee from the business owner or director that if the company cannot repay the debt, the burden would fall to them. If your business is well established with a strong financial background, this guarantee may not be necessary.
Pros
- Is borrowed against the company and not against yourself
- Does not require you to sacrifice control or ownership of your business
Cons
- The full amount needs to be repaid, plus any additional interest rates that apply
- Usually needs a guarantee or assets levied against it
- Requires your business to be more established – not suitable for startups
Crowdfunding
Crowdfunding is the term used for raising money through the public by collecting small donations from many people (as opposed to typical investments of large amounts from one or a small number of investors). This is a good way of raising funds for your business if you are a startup or have yet to start trading. Crowdfunding is useful as it allows you to interact with the public and gives you an indication if people are interested in your products or services.
Crowdfunding works with a two-pronged approach by not only promoting your business and its ideas to a wider audience, but also allowing you to receive funding that may not otherwise be available to you as a new business. The donations are made voluntarily, so the money does not need to be repaid, avoiding costly interest rate repayments. You can also offer further incentives to people for donations by choosing either equity based, where donations are made in exchange for a portion of your business, or rewards based, where donators can get rewards based on the amount they donate. Your business type will typically denote which incentive is best for you.
Like all types of funding, it is not without its downsides. Different crowdfunding sites will charge platform fees for hosting your fundraiser, this typically means losing 5% of the overall funds raised. Additional fees may also apply on top of this. There is no guarantee that you will raise the funds you require, as it does rely on the generosity of others. Less than 25% of all crowdfunding projects achieve their goal, so bear this in mind before relying on it to finance your business.
Pros
- Promotes your business in its early stages to the wider public
- Does not need to be repaid – avoiding costly interest rate repayments
- Can offer small rewards in hopes of receiving more donations
Cons
- A percentage of the funds raised is taken by the hosting website
- Certain additional fees may also apply on top of this charge
- Not a guaranteed way to receive funds – less than 25% of all projects reach their goal
Angel/business Investors
Angel investors (also known as business investors), are wealthy and often experienced business individuals who invest their own money into new and startup businesses, in exchange for some form of equity in the company, for example, a specific number of shares (usually between 10-25%) within a limited by shares company.
Angel investors usually have a specific area of expertise, and will look for new businesses they believe are viable within this area to invest in. The money they invest does not usually need to be repaid, and they choose to invest it to assist with the growth of a business they think could be successful. They will, however, expect a return on the money they invest over the years if the business becomes successful.
As their own money is invested into the company, angel investors can be very hands on in the running of the business, offering mentoring and advice to help you succeed. Angel investors work with businesses for an average of 3 to 8 years, so this type of funding is not for individuals who do not want another person’s input into their business.
This type of funding is not easy to apply for, with detailed pitches and business plans needed to catch the attention of an investor. Multiple discussions with the individual may be necessary, and receiving funds can take around 6 months. Angel investors may not be willing to give you as much funding as you were hoping for, as they cannot risk losing large amounts of personal money in failed businesses.
Pros
- Typically, does not need to be repaid – although if the business is successful, they will expect a return on their money
- Mentoring and experience from a seasoned businessperson can assist with the success of your business
Cons
- Can be difficult and time consuming to receive, and you may not receive as much funding as you hoped
- You will need to offer up a stake in your business
- Not for individuals not willing to work with a stranger for several years
In this blog, we have outlined 6 different types of funding you can apply for to assist with the finances of your business. We hope you better understand the funding you can apply for, and the pros and cons of each type of funding as a startup or small business. Note: The contents of this article do not constitute financial advice. You should speak to a financial advisor for personalised advice and guidance on funding.
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