Building a business isn’t cheap so figuring out just how you will fund your future growth is of vital importance. In this article, TWP look at the six most popular sources of finance you can pursue when looking for funding for your business.
The Start Up Loans Company
If your business is still in its development stages and you’re looking for the funding you need to make your dream a reality, then the Start Up Loans Company (TSULC) could be the perfect solution for you.
On top of providing funding for would-be budding entrepreneurs, TSULC also invest in companies that have been trading for two years or less. It offers the vital finance needed to get your young business off the ground.
The Start Up Loans Company is a subsidiary of the British Business Bank. Its mission is to both deliver the government’s Start Up Loans programme and to encourage entrepreneurial spirit in the UK.
They lend between £500 and £25,000 to businesses looking for finance at an interest rate of 6% per year. TSULC have long dominated the market for younger businesses since its conception in 2012.
While the money is strictly to be used for your company only, these loans are actually personal loans paid into your business bank account. What this means is that should your business not work out, you will still be personally liable to repay the debt you owe. Your loan does not live and die with your company.
This also means those with poor personal credit records will struggle to access this type of funding. The loan can also not be secured on your property or other assets to increase your chance of being accepted.
Since the money comes from public funds through the government loans from TSULC can take as many as three months to go through. So if you need money fast, this may not be the best option for you.
Please click here to find out more about The Start Up Loans Company.
If you or your company do not meet the criteria to qualify for a loan from TSULC, then you can always look into applying for finance through your bank.
While demand for bank loans is down recently, approval rates are at an all-time high. In fact 81% of applications in the second quarter of 2017 successfully resulted in funding according to UK Finance.
Unlike TSULC, bank loans are generally secured against a valuable asset that you personally own. For example, you may be asked to put your home up as collateral in order to access the finance.
Since the financial crisis in 2008, many banks have been hesitant to lend without some form of security so bear this in mind when you come to applying for finance.
Interest rates tend to be around the same level as that charged by the Start Up Loans Company with some banks however in most cases you can expect to pay around 2% to 3% more.
Most UK banks you come across will also consider investments under the Enterprise Finance Guarantee. This provides the lender with a government-backed 75% guarantee against the total you owe them should your company fail.
Be warned that banks will only go to the government for this as the very last resort – they will do everything within their power to recover the money from you first which may include calling in your security to cover your balance.
Specialist business lenders
Over the last few years we have seen more and more specialist business lenders pop up across the world. These private loan providers specialise in offering money to growing companies with more relaxed acceptance criteria than the banks.
These loans don’t require security however you will need to sign a director’s guarantee in order to access finance from them. In many ways, this can be even riskier than using your home as collateral since the repaying the debt becomes your personal responsibility regardless of the success of your company.
Specialist business lending companies will normally offer loans of up to the value of three months of your company’s turnover. They also tend to consider businesses as young as six months old which can make them ideal for early-stage trading businesses.
Think of business angels as like being a small-scale version of Dragon’s Den. You get to put your company before experienced and well-connected investors looking for a seat on your board.
They tend to invest between £20,000 and £250,000 and they look to get their return through an exit (by either selling their shares or reinvesting in your firm) after three or four years.
On top of the financial support you can also benefit from their extensive business expertise, learn from their previous successes, and make new connections through their network.
You can read more on the British Business Angels Association website.
Venture capital and private equity
If you’re looking for a larger investment than business angels are willing to offer then venture capitalists and private equity could be the way to go.
Venture capital is essentially the seed money given to companies which can demonstrate long-term growth potential within their first three years of development. Private equity on the other hand is used to buy stakes in high-growth private companies that are not listed on the stock market.
You can learn more about venture capital and private equity on the British Venture Capital Association’s website.
This is where you raise the money you need for your business by attracting a number of smaller investors. There are three main types of crowdfunding which are:
- Debt-based crowdfunding
This is where the loan is given to you under standard commercial terms. You won’t need to give away any equity in your business either. Companies like Funding Circle can be used to match you up with willing investors.
- Equity-based crowdfunding
This type of crowdfunding involves investors buying a small number of shares in your company. You receive the money you need for growth and investors make their profit on the return on their shares.
- Experiential crowdfunding
Organisations like Kickstarter allow you to raise the funds you need without needing to pay the money back or exchange any equity in order to receive it. Investors may then get to share in the spoils should your project succeed.
Looking to raise money for your business? We can help.
Here at TWP, we have helped businesses across the UK to secure the funding they need at every stage in the business lifecycle. If you’re applying for finance you’re going to need a solid business plan to attract and persuade investors. Call our business experts on 01932 704700 or email your TWP accountant.