Aug 7

Aug 7 How to Fund your Business in the UK

Most businesses encounter the need to raise funds at some point. Whether you’re looking to open your first (or 10th) shop, or you need to purchase additional stock or equipment, knowing where you can access additional finance, and the terms under which that finance is given, allows you to understand the options for your business, ahead of when you need it.

If you’re thinking of raising money for your business, here is a look at some of funding options you should consider:

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Using your own Business revenue and profits

If you already have an existing business that is doing well, consider using your own money/revenue to fund your expansion. Doing so will help you avoid the headaches that come with loans or outside investors. Be careful not to divert too much of your current profits into expanding the business though, this can starve your business and create more trouble than if you financed with a costlier source or you never tried to grow at all.

Using your own Savings

Two of our business spotlights this week, used their own money to finance their business. Gigi from Bag and Bones took voluntary redundancy and used that cash towards her business. Jessica at Piglet in Bed, moved in with her Mum and used her savings to get going. Clearly not everyone's circumstances will mean they are able to do this, but it is a good way of getting started and proving yourself if you can find a way.

How and where to obtain a loan

Below are some of the common ways to apply for a loan:

FAMILY AND FRIENDS

A lot of entrepreneurs turn to their family and friends to finance their ventures. Often, borrowing money from people you know well will help you get the funds you need quickly, at lower rates, and on more flexible terms, or sometimes even as an investment into your business in return for shares, or interest free. Gigi from Bag and Bones used this as well as her own savings to get started "I could' t have done it without the belief of my family" she says.

However, obtaining loans from your friends and relatives can also complicate your relationship and could result in squabbles or unclear terms. Moreover, if you default on paying back your family, the relationship could be soured for some considerable time.

If it works and you all understand what you are getting into then it’s a positive way of raising cash.

Bank Loan

You could also turn to banks. These institutions may offer various loan options, and they often have very straightforward procedures when qualifying applicants. It’s important to note though that many of these financial institutions are very conservative so it can be difficult to qualify for their loans unless you have strong track record or valuable assets to secure the loan.

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Crowdfunding

Some retailers are turning to crowdfunding sites such as Kickstarter and Indiegogo to obtain the funds they need. Here you launch a campaign on their platform website and people pledge money usually in return for being offered tangible rewards and/or experiences in exchange for their pledges. For being able to get their hands on your products ahead of the market place and at a discounted price, for example.

Look at the example of Chris and Ross from The Curious Department who turned to Kickstarter to fund the expansion of the fledgling business into new product lines, not only raising the cash but showing that there was market demand for their product too.

"Once we released our first few parts of the Metamorphosis collection we knew we needed the funds to expand so we decided to go down the Kickstarter route to help us raise the large capital needed to put our china into production. We’re just two guys, totally independently funded. we tried to be realistic with our ambitions and scale, but we didn’t want to quash our dreams either… so we figured the best way to validate our designs with the masses, and not shoulder huge debts in upfront production costs, was to embark on a pre-order campaign, using Kickstarter. This way, we used their huge platform to garner interest in the UK and worldwide, and see if there are enough likeminded quirky and curious individuals who’d appreciate our designs and willing to invite us into their homes!"

However, it’s important to note that not all business crowdfunding campaigns have successful outcomes. The success of a crowdfunding campaign often rests on the how engaged or connected patrons are to a business or project.

SEIS

The Seed Enterprise Investment Scheme is a good way to bring investment into a fledgling business. But it involves taking on an investor, which can be both a positive and negative depending on your point of view. You will have to give away some of your business (shares/equity) to do this, after all investors are investing to make a return and more likely you will have to give some control in the business too. If you want to keep the business all to yourself, then this won't be for you. However, investors can bring experience, the helping hand that helps you through the difficulty decisions, so do not think of this option as only cash.

SEIS is promoted by the UK government. There are several tax reliefs available with 50% of an investors investment available as a credit against income tax from the very start, up to £50,000 per tax year.

If your business is more established and is looking for growth capital you could consider also the Enterprise Investment scheme, EIS. here investors only get 30% of their tax relief so are probably looking for a business which is less risky than a start-up, but if you are generating revenues significantly, then this may be for you.

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Grants

Grants are potentially a source of funding but there are selection criteria in order to qualify, business plans and applications to submit, or other hurdles like deadlines or trying to find them in the first place, although there are websites that link businesses to the many grants that are available.

There is the potential for grants for certain types of trades like social or other welfare entities or otherwise in certain locations largely outside of London and the South UK.

Grants do usually come without any payback terms so are useful means to fund a business, if you have the time and the ability to jump through the loops to apply.

Angel Investor

Most of us have heard of Angel Investors and how new ideas could peak their interest if they can see value where others cannot. The issues might be that they will request a large percentage of equity/ownership from your business. However, angel investors also provide their business experience (having made their money, often, as business people themselves) and help you to deliver on your objectives and so if you are comfortable with this then it could well worth be something to consider.

In summary, there are many different ways to fund the start up of your business, depending on whether you are willing to bring in an investor/angel who might bring some experience but lose a bit of control and some shares/equity or whether you are going to fund it yourself. Remember in order for an investor to come into your business they will need to value it, in order to work out how many shares to take for their money, therefore the more you can do to increase your value, ahead of this, the less of your company you will have to give away.