How to finance a new business

If you’re looking to grow your new business, it’s important to know how to finance it. Financing your business in the right way will provide a solid financial base and ensure you have sufficient funding to help your business succeed. 

There are many different ways to finance a new business and different methods will suit different business types, as this guide explains.

What is business finance?

Business finance is simply the funding a business needs to operate. You’ll need funds to start, run or expand your business. Having sufficient funds available to you will help drive your business forward, allowing you to buy raw materials, hire staff, invest in equipment and so on.

Finance is the foundation of any business as it’s almost impossible to succeed without it. 

What are the best ways to finance a new business?

There are several ways to finance a new business, so it’s important to research each one carefully to help you decide which is the right option for you and your business. 

Personal investments

Investing your own money into your business can be quicker than applying for finance and, as you’re not borrowing from anyone, you won’t need to pay interest. Using your own money can also help to show any future lenders that you’re confident in your company’s success. 

You might have a lump sum to invest in your business if you’ve saved up enough over the years or if you’ve received a large redundancy pay out or inheritance.

Funding from family and friends

It can also be worth asking family or friends whether they would be willing to invest in your business. They might agree to loan you a lump sum which you agree to repay over a set term, with interest added. Or they might ask for a stake in your company in return for their investment. 

The advantage of borrowing through family or friends is that interest rates can be lower. The downside is that if things go wrong, your relationship could be affected. 

Whichever option you choose, make sure you have an official written agreement stating how everything will work. It should explain whether the money is a loan, investment or gift and, if you need to repay the money, it needs to state how repayments will be made and over what length of time, as well as what happens if you can’t repay it. 

Business loans

Business loans are a popular way for companies to borrow money as they give you access to a lump sum of cash which you then repay in monthly instalments over a set term, with interest on top.

Many high street banks and online lenders offer business loans, meaning you’ll have a wide range of options to choose from. Just be aware that some lenders might be less willing to offer you a loan if you haven’t been trading for long and if you don’t have much of a business credit history. 

To increase your chances of acceptance, you’ll need a detailed business plan that outlines your goals and how you plan to use the money. It’s also important to ensure that the amount you want to borrow is affordable so that you can keep up with your repayments. A longer loan term can help reduce your monthly repayments, but this also means you’ll end up paying more interest, making it more expensive in the long run. 

Startup loans

A startup loan is a business loan specifically aimed at new UK businesses to help them launch and grow. It works in the same way as any other business loan, as you borrow a lump sum that is repaid in monthly instalments at a fixed rate of interest. This funding can help you to pay for concepts, testing, designs, machinery, premises, marketing and more.   

To qualify for a startup loan you must be at least 18 years old and living in the UK and your business must have been trading for no more than 36 months. You will also need to be able to show that you couldn’t obtain a loan from alternative sources. 

It’s possible to get a startup loan with a mainstream bank, but the primary source for startup loans is the UK government-backed startup loan scheme, which is offered by the British Business Bank. You’ll usually find that these loans offer lower interest rates compared to business loans provided by mainstream lenders. You can typically borrow between £500 and £25,000 over one to five years. 

Equity investment

Equity investment is another option you could explore and involves selling a stake in your business in exchange for investment. Equity finance investors will have a claim on your future earnings as a result, but you won’t need to worry about repaying the capital or paying interest. 

You might choose to have multiple rounds of equity financing from different types of investors, such as business angels, venture capitalists and private equity funds.

Business angels or angel investors are high net worth individuals who have the money to invest into a business. They typically prefer to invest in startups and early stage businesses, making them ideal if you’re just starting out. Because they are usually experienced entrepreneurs, as well as being able to take advantage of their investment, you can also benefit from their skills, knowledge and contacts, all of which can help your business to grow. 

Business angels usually invest between £50,000 and £500,000 and they might work on their own or as part of an angel network. 

By contrast, venture capitalists won’t invest their own money in your business; rather they will invest other people’s. They do this by setting up a fund for others to buy shares in the company. They usually invest larger sums and the return on investment is often higher too. 

Private equity funds are pools of capital to be invested in a company, making this more suited to established private businesses. The money managed by the fund usually comes from institutional investors such as large pension funds, insurance companies and sovereign wealth funds. 

While venture capitalists tend to invest upwards of £250,000 in high-growth startups and early stage businesses that need capital and business expertise, private equity firms tend to invest much larger amounts, say upwards of £5 million, in established businesses that need a cash injection or a new strategy to help move them forwards. In return, they will usually have a large or controlling share in your business. 

You can find out more about how to find investors for your business with our guide.  

Crowdfunding

Crowdfunding enables you to collect money from a large number of people via online platforms. Depending on the type of crowdfunding you use, these people might get a share in the company or a reward in exchange for their investment. As well as helping you to raise money, crowdfunding can also raise the profile of your business, which can boost its chances of success. 

If you want to raise money through crowdfunding, you’ll need to decide how much money you need and then create a campaign to show what your business has to offer and why you need the investment. This will be displayed on the crowdfunding website for a set number of days. Platforms you can use include Seedrs, Crowdfunder and Crowdcube.

Be aware that not all crowdfunding campaigns succeed and you’re likely to have better luck if your business has good growth potential and offers an innovative idea. If your business model is fairly traditional, crowdfunding might not be the right choice for you. 

Peer-to-peer lenders

Peer-to-peer lending is a type of business loan that’s offered by a number of private investors usually through an online platform. The idea is that it removes the need for financial institutions like banks and, instead, matches those who need to borrow money with those who have money to invest. Borrowers get better interest rates than they would with a standard loan, while investors can get a better rate than they’d get on a standard savings account. 

If you’re thinking of applying, you’ll need to complete an application form on a peer-to-peer lending website. Your risk profile will then be assessed and you’ll be given a credit rating. After this, you’ll be sent different options from proposed lenders with varying interest rates and you can choose the best one for your business. The stronger your business profile, the lower the interest rate on your loan.

Business grants

A business grant is a sum of money awarded to a business to help it grow and develop. You can choose to invest the money in training, equipment or reaching new markets, for instance. Business grants are usually awarded by the government or other companies and, unlike loans, they do not need to be repaid.

Across the UK, there are hundreds of different grants you can apply for, but these will often be targeted at specific industries, community groups or types of business, so eligibility criteria will be tight. Depending on your business, you might be able to choose from the following:

• Innovation grants, which are provided by funding bodies such as Innovate UK to support innovative ideas and business growth. 
• R&D tax credits, which are cash payments from the government to encourage companies to carry out research and development projects related to science and technology.
• The National Lottery Heritage Fund which provides grants to sustain and transform the UK’s heritage.
• Local Enterprise Partnerships, of which there are 38 across England. These are voluntary partnerships between local authorities and businesses that provide business funding, support and guidance in their local areas. 
• The Prince’s Trust which supports young people who want to start and run their own business.

When applying for a business grant, you’ll need to write a business grant proposal to explain what you plan to do, how your business meets the grant qualifying criteria and what success looks like as a result of taking on the grant.

You can view the many options available to you by registering with Swoop. There’s a wide range of grants available across several sectors including grants for manufacturing, tech businesses, transport, energy, information and communication technologies, security, climate, aerospace, food, health, environment, and more. 

How to choose the right finance option for your business

To help you decide which finance option is right for your business, you will need to think about how much funding you actually need, factoring in how much it will cost to get your business off the ground as well as operating costs for the year ahead. You’ll need to ensure you have enough money to get your business started, but you should also avoid borrowing more than you can afford to repay as this can ultimately lead to financial difficulty.

You then need to consider which of the above funding options might enable you to borrow this sum of money. Go through the different types of funding available and consider the pros and cons of each to help you decide which one might be the best fit. 

Ask yourself whether you’re happy to offer people a stake in your business in return for their investment, or if you’d prefer to opt for a traditional loan, which you will need to repay with interest. If you’d prefer to take out a business loan, check that you will be able to comfortably afford the repayments. Bear in mind that UK government-backed startup loans are unsecured and offer a lower interest rate compared to business loans offered by mainstream lenders.

It’s also important to consider eligibility criteria. If you’re looking into business grants, for example, you’ll need to meet strict eligibility criteria to qualify. If you’re not eligible, you’ll need to look at alternative options. 

Similarly, if you have a fairly traditional business model, crowdfunding might not be the most appropriate route for you to go down. 

If you’re not sure which funding option is right for your new business, the team of experts at Swoop will be happy to talk through your options and help you find the best solution for you. Register your business to get started.