Updated: May 10
When it comes to financing a start-up, there are several funding choices to consider. If you're able to grow your business organically, you can limit upfront cash and reinvest revenue. However, if you need to develop your product or service quickly, you may need to invest in marketing to grow quickly and grab market share before others.
In this post we look at ways of funding your start up business.
With these options available, it is possible to find the right funding route for your business and ambition.
When creating a cash flow forecast, consider different scenarios such as the high investment/fast growth scenario, slow burn scenario, optimistic scenario, and worst-case scenario. If you're unable to finance your start-up yourself, there are two main funding options: debt and equity. Debt involves taking out a loan, while equity involves selling a slice of the business.
When it comes to funding a business, there are various options available. Here are seven of the most common:
Family, friends, and fools: This is a traditional route for obtaining a short-term loan or long-term equity. It is often the easiest and quickest option, but not available to many. Additionally, it can put a strain on even the strongest relationships if the business runs into difficulty.
Banks: For businesses generating cash, banks can provide loans. Banks are under pressure to demonstrate their support for growth businesses, but they limit their risk. This means that business owners are usually required to provide a personal guarantee, which can put their personal assets at risk if they are unable to repay the loan.
Peer-to-peer marketplaces: Funding Circle is an example of a platform that assesses the risk, liquidity, and value of a business's assets and facilitates private individuals lending cash. In return, investors receive higher interest rates than they would from stashing their cash in a bank.
Founder's cash: If you believe in your business and have some savings, you can use your own cash to invest before building revenue. This option allows you to avoid giving away equity at a low early valuation. Alternatively, you can find a business partner who is willing to put in some cash as well as expertise to become a co-founder. If the business subsequently raises equity funding, investors value the commitment and confidence founders show by risking their own cash.
Angel investors: These investors typically invest in exchange for equity, but sometimes as a loan. Amounts are usually between £5,000 and £100,000. Angels often invest as part of a syndicate, where they may know each other or have come together specifically for one investment. Some may be "smart money," investors that have and are willing to share expertise and contacts within your sector. Finding angels can be time-consuming, so it can be useful to use networks for introductions, although they typically charge a fee. Regardless of how you find them, you will need to spend time meeting angels and pitching your story.
Equity crowdfunding: Platforms like Seedrs and Crowdcube have become a useful source of start-up equity funding over the past eight years. Investors typically invest between £100 and £50,000 through crowdfunding, with a long tail at the bottom end and very few at the top. A business raising £100,000 could easily end up with hundreds of shareholders. Although these investors can be useful advocates for a consumer business, many small shareholders can be a burden later down the line. Additionally, creating a compelling campaign requires a significant up-front time investment. Crowdfunding is not as democratic as we would like to believe. For a campaign to be successful, 30% to 40% of the funding needs to be committed before kick-off.
Investment funds: The government offers generous tax reliefs for investing in start-ups, but few investors have the time to consider their own deals or would back their own judgment in this specialized space. So there are funds that do the leg-work and give investors a diversified portfolio of investments. If a start-up can attract investment from a fund, it is a very efficient option. Fees are similar to those charged by angel networks or crowdfunding platforms, but for one conversation and one set of paperwork for the entire funding and subsequent shareholding. Generally, the funds are backed by sophisticated investors and are well placed to provide follow-on funding as the business grows.
With these options available, it is possible to find the right funding route for your business and ambition. Good luck!