Funding a Startup

There are a number of ways of funding a startup, but not all will necessarily be suitable to your particular business needs.  It would be sensible to consider the following at the outset:

  1. Is funding actually needed?  A common assumption is that funding is essential from the outset, when in fact it may only become necessary further down the line.
  2. How much funding is needed?
  3. What source of funding is appropriate?

When deciding on the source of funding, the range of possibilities can often be overwhelming.  The list below is not intended to be a definitive explanation of these possibilities, but rather an example of what might be available.  You should conduct your own careful research and, if necessary, consult a qualified financial advisor.

1. The Traditional Approach

Traditionally an entrepreneur would secure funding either through private finance (family and friends) or through a bank or building society, with security or a percentage share of the business being given as collateral.

Also, in recent years, the government has made a number of attempts to kick-start lending by way of government-backed funding, tax reliefs, loans, grants and competitions.

 Government-Backed Funding & Tax Reliefs

The following are examples of the government funding and tax relief sources now available:

  • Seed Enterprise Investment (“SEIS”) – This scheme offers generous tax breaks for individuals investing in startup companies.  The scheme is subject to a limit of £150,000 and EIS relief is available for larger share issues.  Follow this link for a detailed commentary on both schemes.
  • Enterprise Finance Guarantee – This scheme is aimed at those who have been unable to secure a loan due to lack of security or proven track record.  This is ideal for startups, provided you can prove some means of repayment.
  • Supply Chain Finance Scheme – Large UK companies have signed up to this scheme allowing small companies to obtain bank funding provided they have secured a supply contract to one of the large companies which has signed up to the scheme.  This can be helpful to small companies who are struggling to meet demand from these larger companies or are facing cashflow problems.
  • Startup loans – These are government funded loans aimed at those with a worthwhile business idea but with no access to finance.  Aside from finance, business advice is also offered.
  • Regional Growth Funds – This source of financing is generally aimed at businesses which are up and running, with the intention to help grow that business and therefore produce more jobs in local areas across England.  £3.2b has been allocated to the fund and companies can submit bids for a share of these funds to finance their plans.
  • Research & Development Tax Credits – This scheme enables HM Revenue & Customs to pay cash to qualifying companies that are doing innovative research and development.  Companies can get up to 25% of their research and development spend refunded each year after it files its accounts.

Aside from government-backed schemes, certain independent bodies offer financial assistance.  For example, if you have a technology or science-focused startup, the Technology Strategy Board (“TSB”), an independent public body reporting to the government, offers a number of sources of financial support:

  • Smart Grants – TSB’s Smart Grants scheme is focused on businesses carrying out science, engineering and technology research and development projects.  The competition for the grants is fierce, but successful applicants can earn up to £250k of funding.
  • Small Business Research Initiative – This TSB scheme connects new businesses with government contracts.
  • Innovation Vouchers – These TSB vouchers provide the funding needed to work with external experts helping your business grow.
  • Other TSB Schemes: TSB run a number of competitions, details of which can be found here.

 2. The Modern Approach

If the traditional options fail or simply do not seem workable for your business model, you can look at some of the more recent and innovative ways of funding.

Crowdfunding

This source of funding is developing at an incredible pace and has helped many business ideas get off the ground.  Typically, large numbers of individuals make small investments in a startup, each qualifying for SEIS relief.

Examples: Crowdcube, Seedrs, Kickstarter, Indiegogo.

Angels

Angels are wealthy individuals looking to invest in, and help with the development of, startup businesses.  There is big incentive for angels to invest due to the SEIS and EIS tax breaks mentioned above.

A good starting point is the British Business Angels Association where you will need to pitch your idea to the angels to get them to invest – think Dragons’ Den!

Peer-to-peer lending

Websites offering peer-to-peer lending match individual lenders with individuals or companies looking to borrow.  From 1st April 2014 this sector is now regulated by the Financial Conduct Authority.  The incentive for the lender is the often favourable rate of interest charged on the loan, up to around 6%.

Examples: Zopa , RateSetter, Funding Circle.

The above is by no means an exhaustive list.  You should conduct your own careful research after having considered the funding required and, if necessary, take advice from a financial advisor.