12 Sources to Secure Funding For Your Start Up

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How To Fund A New Business Startup

By Jamieson Lee Hill, Head of Copywriting at LMB and Videogame Storywriter

Financing your business is an essential part of setting up and maintaining your startup. You need to be able to cover all your costs and breakeven in the early stages of your company before you start to make profit.

I am sure you have heard the horror stories of new businesses going out of business in their first year due to a lack of funds or an inability to breakeven. It doesn't have to be like that if you carefully plan your business with a coherent and well thought out plan as we saw in section 4.

Also, a solid foundation of funding will preserve the long term health of your business venture. Let’s explore a number of ways to finance your new business:

Family and Friends

If you have willing parents or other relatives who want to support your start up, this could be a decent option. With family they may be flexible about when you have to pay it back which takes the pressure off you in your first year. Also, they may not expect you to pay them back.

Whatever your arrangement, be warned that there is a negative side to family financial support. If the business doesn’t work out and you struggle to pay your relative back, this can really sour relationships. Likewise with friends. Personally, I would never ask a friend for a loan because I have learned from experience that you can easily get into hot water. In my case, I loaned money to a friend to help his business and I never saw him or the money again. But it depends on the relationship you have with your friends.

Do it Yourself

Self-funding is the choice for many start-up owners. Digging into your savings means that you don’t have to worry about paying back loans at a percentage to banks or other financial institutions. However, you don’t want to use up your savings until you are really certain that you have a viable business plan. So make sure you do indepth research before you start transferring funds.

Alternatively, if you don’t want to touch your savings, you could sell off some personal assets that you can go without e.g. Do you really need your summer motorbike considering you will be really busy now with the new business and you already have a car? Could you get your old laptop, bike or other objects fixed and sell them on for a profit? You would be surprised at the sale value of items you have in your flat or house which are just gathering dust. Your excess belongings could be someone else’s treasure.

Investors

Two of the most common types of alternative funding are angel investors and venture capitalists. Investors often prefer investing in innovative startup firms specialising in technology and science. However, if you have a sound business model and plan with a potentially lucrative product/service proposal, you may secure investment for your venture.

Angel investors are wealthy individuals who put their own money into new companies for a share of the business. Venture capitalists are employees of Risk Capital Companies who are looking to invest money belonging to other people into ventures.

Venture capitalists invest in exciting startups with a great potential for high profits. If your startup has a strong likelihood of success in future you may be able to get a VC to invest.

With an Angel Investor, you need to show them clearly how they will make a profitable return on their investment and be very careful to read the terms and conditions of your agreement. If they are taking 30% of your business, what does that 30% include? Does it also mean any PAYE jobs that do during the contractual period? Or is it just 30% of profits by the company? Read the small print and be very clear about what you are signing up to. This happened to a friend who secured investment for his business from an investor on BBC Dragon’s Den Internet Show! See the last section for more about this.

Back up the valuation of your startup with real world sales forecasts and projections. Also, don’t count on an angel investor being in it for the long term. They might just be an early stage investor who wants to put in money and earn it back with interest and then withdraw it. They may not be looking to be a long term business partner with your firm.

Government Startup Loan and Grants From Organizations

A government startup loan can be a very effective way to get your business off the ground. However, you will need to prepare a serious business plan to show them how your business will be successful. A startup loan can be anything from £500 to £25000 in the UK or whatever the equivalent amounts are in your country.

The main difference between a government startup loan is that it is not secured like a business loan where you need to have capital assets to secure the loan e.g. your flat or house. Government loan schemes will also usually give you free support and advice to help you write the business plan and a free mentoring scheme in the first 6 to 12 months.

For a government startup loan you will need to be a resident in the country and over 18. Also, the business will probably need to be less than 2 years old to qualify. Most government loans are set at a fixed rate of interest, although it may differ depending on the country you live in. In the UK you have to repay the loan within 5 years.

For more information about government loans please visit the following links:

Business Grants and Funds

An alternative to a loan is to apply for a grant. You may qualify for a grant or fund if you fall into a certain category i.e. coming from an underprivileged economic background, refugee status, disability, gender based etc.

Grants are also given in certain niche areas that governments and organisations want to encourage growth in e.g. the alternative energy sector, technology and innovation, architectural interest, heritage projects, medical innovation. Here are some useful links for you to read through:

Small Business Loans from Banks

You may be eligible for a bank loan. However, your finances will need to be in a good state of affairs. Banks will only loan money to businesses if there is credible evidence that you will be able to pay the loan back or that you have capital assets to secure the loan.

If you have a bad credit history, then you are unlikely to receive a loan from a bank. As before you will need to write a very well researched and well presented business plan with clear goals and forecasts for sales, costs, profits and so forth.

Seed Capital

Seed capital is the investment or initial capital used during the setting up of the business. The finances may come from friends, families or the partners themselves. Seeding is much more than just the basic set up costs for your office or premises. Seed capital is the finances needed for product development, market research and early stage actions.

The seed capital is basically used during the research stages to help develop the product or service to the point where you can get venture capitalists or similar investors on board. In your business plan, you should clearly map out how the seed capital will be used and the steps taken. Seed capital is similar to a loan as you may have to pay it back and it helps finance the business during the early stages of starting up.

Finance Lease

In a similar way to HP, this is a good way for a SME to save money during start up. The asset is leased over a period of time and not bought outright. It is suitable when a business only needs an item for a short period of time.

The business does not pay an upfront fee or the complete value of the product. The monthly payments only cover the asset’s worth during the specified time period of the lease.

A lease is useful for larger assets such as machinery which your company only needs in the short term. Also, you don't need to include a leased item on your account balance sheet because you don’t own them as a capital asset. However, you can record the lease charges in your costs to reduce your tax bill.

Business Competitions

Business Competitions are a potential way to raise funds. The winners will often bank a large amount of money and PR, support and advice from a large organisation. There are numerous competitions offering money prizes from small to large sums to innovative startups and companies that are in their early stages.

The best thing to do is to search Google for Business competitions for Startups. Here are two to get you started if you live in the UK or USA:

Start Up Competitions to Fund Your Business UK

Start Up Savant Competitions USA

N.B. Check the rules and regulations for each competition as they are usually aimed at different sectors, varying categories, age groups, economic circumstances etc.

Crowdfunding

Increasingly popular, crowdfunding is a way of raising money by asking the public to give donations to realise your start up idea. Your idea needs to be innovative and capture the imagination of the public and then keep them engaged as you show the development of your business idea.

Crowdfunding platforms allow you to pitch your idea to thousands of investors on the internet. Here are some of the leading Crowdfunding organisations:

Indiegogo
Kickstarter
SeedInvest
Crowdfunder
CircleUp
Patreon
Wefunder
GoFundMe

With a crowdfunding business start up, investors will often be given an equity share of the company’s future revenue in return for their funding. Crowdfunding can be a very cost effective way to raise funds because not only can you attract funds from a wide range of people, it also means that you have an engaged audience before you launch your products and services.

If people have an equity share in your business, then they are also likely to share content about it on their social media and tell friends! All in all, crowdfunding done well can be a winner.

Reflections - Things to Keep in Mind about Funding your Startup

Funding can often be secured if you have a comprehensive and well thought out business plan with clear goals and action points. Show banks or investors that you mean business with your plan. If you don’t have clear goals and approaches, you are unlikely to instill faith in others. Similarly, you need to demonstrate to investors and banks the risks involved.

Planning how to fund a business is a serious undertaking that requires methodical thought and application. As a small business, you may seek more than one source of funding over time. The main thing is to calculate your revenues and expenses and be certain that you can stay afloat. Build relationships with investors and banks based on mutual trust and openness. Ensure that you have your finger on the pulse of profit margins and keep a close eye on overhead costs and unexpected costs.

Equally important is that when you make a valuation of your startup that you support your assessment with real sales forecasts and projected costs to show to banks and investors.

The secret to financial success in the modern day business world is to be a thriving generator of innovation and creativity. Those businesses that do not innovate and move with trends are likely to be left behind. Unless of course your market is fairly static and your product simple e.g. a local cider producer that has had steady sales for years and has no need to advertise as all the customers come by word of mouth.

If you are seeking investment for external sources of funding, you should show them how you have also invested your own money in the project. When you draw up a contract for investment be very careful to read the terms and conditions clearly before you sign anything. A friend appeared on BBC Dragons Den years ago and managed to secure funding from a Dragon. Later he pulled out of the deal as what he had signed up for basically gave 40% of his earnings from his PAYE job to the dragon as well as 40% of the company. This was not clear during the internet TV Show. So read the small print and be sure you understand what you are getting yourself into by accepting investment into the business.

It goes without saying that you should be financially sound and stable before applying for investment opportunities. If you have massive personal debts, you are unlikely to attract investors as they will perceive you as a high risk. By compiling financial reports you can demonstrate to investors that you are financially stable and a safe prospect.

Also, you need to show evidence that your business is ready to accept investment and take action with it immediately and make effective use of it. Without a clear action plan and goals for what you will do with the investment, you are unlikely to persuade an investor to come on board.

Which source of funding is best?

To echo my earlier advice, it may be that you have more than one source of funding. Whichever way you choose, the important consideration is the growth and financial security of your business. Also, don’t select a source of funding that is going to cause you intense stress that will impact on your mental and emotional health.

So be comfortable with the funding method you have chosen, instead of worrying about unfavourable terms and conditions from an investor or an angry family member or friend who is demanding their money back, select a safer method that suits you.

Measure the Metrics

No matter the source of funding, most of them have pitfalls that could affect your business if you fail to meet commitments or agreements. Therefore, it is important to keep your eye on your growth targets and watch how your cash flow predictions and sales forecasts are performing.

Also, watch your debts and settle negative balances as soon as possible so that you don’t damage your business relationships within the supply chain for invoices that your business owes. Nobody likes a late payment. Equally important is to keep an eye on your profit margins. Are the business deals you are pursuing making enough profit to be sustainable?

Don’t be too proud to ask for help from family if they are in a position to help out. If you don’t like this idea or it isn’t an option, a bank loan could be the safest option or if you have a sound business plan you may be lucky enough to attract external investment. However, angel investors will need to see a strong potential for decent profits to invest and gain a share in your venture.

If you meet the criteria for a government start up loan or a grant, this is also a potentially safe route for funding your new business!

However you fund your business, we wish you the greatest success in the world!

P.S. Please add your ways of funding your business in the comments below.

P.P.S. Massive thanks to my intern team that helped with the research for this article - Sophia, Mary, Paulyn and Trisha.