How to Fund a Small Business or Startup in 2020
I’ve always been shocked by the often quoted statistic that 8 out of 10 business ventures end in failure within the first two years.
And in fact, this “statistic” isn’t as well-founded as you might think. In truth, many more businesses than this do succeed. But it is true that the first two years of a business’ life are a dangerous time, and that most businesses that do fail in this period do so for two reasons: lack of cash and lack of planning.
This is still true if you are starting your business as a so-called “side hustle”, whilst continuing with your full-time job. You might be thinking that funding this kind of endeavour is a no-brainer, that you are just going to get a personal loan or use your credit cards, but this might be just what leads your business idea to fail when you run out of cash.
In business, like life, it is important to deal with everything head-on. So, let’s deal with what is often an uncomfortable topic right now.
Where are you going to get the money?
In this article, we are going to take a look at how you can fund your venture, covering the following sources of funding:
- Friends and family
- Grants and awards
- Traditional borrowing (loans)
The forms of funding available to you vary dramatically, as do the costs associated with them. It’s worth considering that most businesses are not funded by one ‘type’ of funding alone – it’s usually a mix. A little bit of owner investment from savings, perhaps a loan, grant, or investment from a partner in the business.
Don’t feel pressured to seek funding from the sources that offer you the most money – and ALWAYS take care to understand exactly how much the funding you are considering is going to cost you. Money, no matter the source, always comes with some strings attached.
Let’s start by looking at the different ways of funding your business, along with the advantages and disadvantages of each.
Bootstrapping or self-funding your small business
There are a few reasons why you might want to take on this route. You may not want to hand over the decision making, or a share in your business to investors. You may not have the credit rating needed to guarantee a loan, or you might be starting a small business that doesn’t have any significant expenses that would require external funding.
Of course if you go this route the rewards are all yours – but so are the risks.
The main ways for self-funders to ensure that their cash flow is relatively smooth during the startup phase are:
- Savings – Generally speaking, you’ll want enough to tide you over for at least the first six months of trading. Make sure you consider the worst-case scenarios! This route means that you aren’t getting yourself into debt. You’ll be able to claim back any money invested into the business this way through director loan repayments once the business is making a profit.
- Credit Card – this can be a fairly affordable way to start your business if and only if you use a 0% interest rate card and ensure that you pay the money back on time. Rates on credit cards can vary enormously, but quite often they are significantly cheaper than running an overdraft. Shopping around and taking advantage of 0% offers can help to support small startups that don’t need much funding. The downside to this route is that you are getting yourself into debt and you will need to find the money to repay the debt, whether or not the venture is a success.
- Overdrafts – You may have been used to living on your overdraft when studying. Just don’t forget, it’s not free money! You need to replace it, whether you are successful or not. If you’re not a student, you’ll want to make sure the interest you’re likely to pay on your overdraft is less than through other routes. Again, you are personally getting yourself in debt via this route… which is not a very sure footing to start your business on!
- Pay-as-you-go – if you are in full-time employment you might consider paying any expenses to startup your new business from your monthly salary until you are making enough sales for the business to support itself. This is a perfectly viable proposition and plenty of people have achieved it successfully. You’re not getting yourself into debt here, which is a great benefit.
- Many countries have schemes that help those claiming unemployment benefit start a business or become self-employed. These schemes often offer both mentoring support and additional cash whilst you are still on benefits to help you fund your startup. You can find details of the UK version of this scheme here.
Borrowing from friends or family
Mixing business with friends and family, even if you are able to, can often be a little tricky and there are probably as many reasons against going down this route as there are for it.
You need to think very carefully about what strings might be attached and what kind of formal legal footing you might want to put a gift or loan on. Getting a financial adviser, solicitor or specialist in family succession planning will help you to understand what implications might be involved.
Startup Business Grants and Awards
It is always worth taking a look to see if there are any foundations, charities or government bodies that can help you with your initial funding in the form of a grant or award.
Grants and awards are as close as it gets to “free” money, but that doesn’t mean that they are easy to obtain. You’ll often have to complete application forms, provide business plans and go to interviews, but they can be worth the time and energy to jump through the necessary hoops.
You’ll want to do industry specific searches on the web, visit your local British Library Business & IP Centre that has listing/databases of grants and awards and take a look at our list below to give you some inspiration:
Social Enterprises – unltd – they provide awards and grants for every stage of your fledgling social enterprise.
Research and Development Tax Credit Scheme – claim back a good proportion of your R&D costs every year.
Young Entrepreneurs – grants and startup support.
Arts – Arts Council – audio-visual, broadcast and transmission, buildings and infrastructure, capacity building, commissioning, digital creation, diversity and equality, education and learning, exhibition, festival, organisational development, original work, participation, performance, production, professional development, publishing, research and development, sector development, talent development and touring.
Local finance and support – list of all regional finance and support available.
Crowdfunding your startup
Crowdfunding is not quite as new an innovation as you might think. If you haven’t come across this term before, it is where you raise your funding through a website (your own or a dedicated online platform) or an external organisation. You can raise the funds by various means:
- People subscribing to you for a monthly fee
- Giving people a share in your business
- Taking the funding as a loan
- Providing rewards or goods in return for the funding
Credit Unions – these organisations first appeared in the mid-nineteenth century. They are usually locally based and are cooperatives i.e. the members of the union are both lenders in the union as well as borrowers. Credit Unions often lend under £10,000 as loans for startups and small businesses, but they also generally have links to other local organisations that are able to provide more funding than that.
Equity Sites – there are platforms out there like crowdcube, seedrs, syndicateroom, AngelList that pool investor funds together to lend to startups and more mature businesses in return for a share of the company. Equity sites tend to provide funding upward of £50,000.
Loan Sites – sites like FundingCircle lend money from investors as loans from £10,000 + and the loans tend to be unsecured up to £500,000. No shares in your business are given away and you pay interest and/or capital back on a monthly basis as you would with a normal loan.
Pledges, subscriptions, rewards and products – there are a myriad of solutions for funding your product, service, game, writing or book via online platforms. Just a few of note are:
- Patreon – If you are a writer, streamer or artist then you could use this platform to fund your work via monthly subscriptions.
- Kickstarter – Funds a wide variety of businesses, products and services like art, comics, crafts, dance, design, fashion, film & video, food, games, journalism, music, photography, publishing, technology and theater.
- Indigogo – Funds the same types of project as Kickstarter
- GoFundMe – this site isn’t just for charity fundraising. You can raise funding for your business idea too.
- Unbound – funds books
Hopefully the above lists have given you a bit of food for thought in terms of alternative forms of funding now it is time to go and do some Google searches, as well as exploring the options above and see what might work for you and your business idea.
Traditional borrowing – small business loans
Business loans, business overdraft and leasing through specialist lenders or high street banks and building societies are also viable options and worth exploring.
Some banks still require a mountain of paperwork and security in the form of a charge against the business premises, your personal property and even a personal guarantee from you. You’ll need to weigh up the risks of potentially putting your home at risk for this type of lending. Independent financial advice should always be sought if you are looking at this type of funding.
For smaller amount, there are plenty of traditional sources of funding who do not require this type of security and guarantees for sums below £25,000. The way to go about this is to look at all the big names: Metro Bank, Barclays, NatWest, HSBC, Santander, Nationwide etc.
The impact of funding on your financial plan
As usual, we’re coming back to your financial plan at the end of the article! Funding plays an enormous roll in your financial plan, as almost all businesses require some outlay of cash to purchase equipment, initial stock, supplies or pay for other expenses before they start receiving cash from their customers or clients in return.
Often, financial plans are required by lenders or investors in order to secure funding. But for your own purposes, try experimenting with what you can do with different levels of funding, or with differing times that funding becomes available.
Can you grow the business more effectively with greater initial investment?
Can the business handle the increased financial commitments of greater repayments, interest charges or other ‘strings-attached’ that come with your choices of funding?
Alternatively, could the business start with a smaller amount of funding, seeking to prove itself in search of further funding, or grow organically?
Questions like this are great things to ask of your financial plan. We’ll be covering how to present this plan and get the most out of it in Week 13!
For now, if you haven’t checked out this week’s other post, give it a read as it chimes nicely with this one. It focuses on which investors you should aim to approach and pitch to in order to secure funding.