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How can startups get funding? 8 Methods
So, you want to start up a business, but you don’t have the capital to fund your idea and have no idea how to get it - don’t worry, at Clifton Private Finance, we have the expertise needed to help you get the perfect business startup funding.
How can startups get funding?
The 8 most common ways that startups can get funding are:
- Family and friends
- Venture capital
- Crowdfunding
- Grants
- Unsecured business loans
- Asset-based loans
- Lines of credit
- Asset finance
Let's explain these options in more detail, and compare the pros and cons of each.
Investment Capital
The first way to get money for your business is to either have it yourself personally, or find someone else who has money and is happy to give it to you. This is called investment.
Personal investment, that is money that you provide to your business from your own personal finances, is a typical initial route, with many entrepreneurs dipping into their own savings to get their idea off the ground.
However, in many cases, you simply won’t have the amount of money needed to get your business running (and keep it going) lying around, and you’ll have to turn to others.
It should be noted that some personal investment is often expected when looking at starting a new business. While it’s not impossible to start a business using startup funding from other sources alone, showing that you are willing to ‘put your money where your mouth is’ does go a long way to convince others to jump on board with you.
Investment that doesn’t come from your own finances can come from a range of other sources:
1. Family and friends
It is not unusual to take your business idea to those who you trust (and who trust you) to see if they’re willing to pitch in to the idea.
2. Venture capital
Professional investors are another common route, offering not just an injection of cash, but also a range of skills and advice, and an established network of contacts.
3. Crowdfunding
For the past quarter of a century, crowdfunding has enabled many businesses to get the capital they need to get off the ground. It can require some good marketing skills and some comprehensive organisation, but crowdfunding is a legitimate route to gaining investment.
Each investor (including yourself, if personally investing) becomes an owner of a share of your company. This means they will have the right to be involved in decision making and, depending on the size of their stake, may even have a controlling interest.
4. Grants
Grants represent non-dilutive capital provided to the company that does not need to be repaid. In other words, free money.
Of course, free doesn’t mean that it comes without restriction; grants are typically provided with stringent conditions on use that limit them considerably.
For startups, however, grants such as innovation grants offer a helping hand that shouldn’t be ignored. The UK government offers a range of grants specifically designed for startups, while other institutions, such as the Prince of Wales Trust, provide grants for young people (aged under 30) as business startup funding.
If your prospective company fulfils the criteria for a grant then it is well worth considering an application. Many grants are competitive, meaning only a few (sometimes only one) applicants will be successful, so it is important to dedicate the time needed to construct a developed application that ensures your business is chosen.
Loans
The third option, and for many the primary choice, is that of a business loan. Business startup finance represents a range of products designed to provide capital needed for your burgeoning enterprise, and while an unsecured loan is one type of funding available, it is only one of a host of options that can help:
5. Unsecured Loans
This is the type of business startup funding most people consider when they think of a business loan.
A range of unsecured business loans are available for startup businesses and many come with government support, taking some of the pressure off the application process.
You are also likely to be asked for a personal director’s guarantee as collateral for the loan (note: the government startup loan scheme removes the need for a director’s guarantee). See related: Personal Guarantee Insurance
6. Asset-Based Loans
Also called ‘secured loans’, asset-based loans are tied to a tangible asset owned by the business, such as equipment or property.
By having this guarantee, the risk of the loan is lowered for the lender and so asset-based loans typically have more favourable interest rates and are available for larger sums. As many startup businesses do not have significant tangible assets, secured loans as business startup funding are rarer than their unsecured cousins.
7. Lines of Credit
Revolving credit facilities such as company credit cards and business bank overdrafts can provide an additional level of business cash flow that can help during the early stages of a startup.
It is essential, however, that lines of credit are well-managed as over-reliance on credit cards or overdrafts can cause longer-term financial distress for companies.
8. Asset Finance
Hire purchase agreements, finance leasing, and operating leasing are all different ways for startup companies to obtain important assets, such as equipment, machinery, vehicles, and technology.
Spreading the cost of these essential assets, asset finance is there to support startups get the items they need to do their work.
Latest Business Financing Case Studies
Below is a snapshot of our latest case studies, in which we broker finance solutions for businesses of all shapes and sizes, negotiating the best rates and terms and advising on the correct finance routes:
Why Get Business Startup Funding?
You cannot start a business without money. While there are some businesses that can be run on a relative shoestring, most businesses require both capital and cash flow to get going.
It is essential that when you consider starting your business you look at the finances you are going to need, not just to initiate the business, but also to keep it going for the months (or sometimes years) until it becomes fully self-sufficient and profitable.
Many businesses fail because they don’t take their running costs into account, making the erroneous assumption that once they are established, there will be enough money coming in to keep going.
Business startup funding can help with both capital and cash flow issues, offering both the initial money needed to get off the ground, and a stable lifeline for use until the business cash flow is looking after itself.
How Business Startup Funding Works
The Business Idea
The first moment is when the idea hits you. From there, it germinates in your mind until it becomes something you know is going to work. Maybe it’ll make you rich!
The Business Plan
Getting the business plan right is essential for making the most of business startup funding.
The business plan is the place where you get to explain and sell your business to potential funders.
If you are considering investment, then your business plan will tell investors what you are offering them; if you are looking for a grant then the business plan is vital to show that you meet the criteria of their award, and that you are the best business to consider when making that final judgement; and if you are planning on getting a loan or other financial product, then your business plan will detail the risks to the lender, improving the likelihood that your application will be a success and the interest rates offered will be favourable.
The Advice
Business plan in hand, complete with a forecast of figures for the coming years, you are now in the market for some business startup funding.
It’s time to get some advice.
There are a huge number of financial products out there, with hundreds of potential banks, lenders, and investors to choose from.
Researching the subject and sifting through the huge amount of material available can be overwhelming - so consider talking to the professionals.
How Much Could You Borrow?
Use our business loan calculator below to see what you could borrow.
The Application
Finally, it’s time to put in that application. Don’t rush - it’s important that you get all this right or you could dampen your chances.
Talk to us at Clifton Private Finance and we’ll take you through step-by-step, making sure every t is correctly crossed and every i perfectly dotted.
