According to a report, “about 94% of the startup business fail at the initial stage”. The long journey needs enough capital apart from resources to keep the show going.
However, funding depends on the nature of the business. So it is all about choosing the right funding option for your business in the initial stage.
Every fund-raising strategy and every money source implies some ready funds in your hands and other commitments. If an entrepreneur misses out on capturing this, he/she may end up signing up for a poor deal.
Here is a comprehensive guide that will help you choose the suitable funding options given the resources and the business type.
How To Determine the Right Funding Type of Business?
While seeking funding for your business, remember never consider bankers or creditors as the sole source for generating funds for your business. You can determine the funding type according to the below parameters:
- How much is the company’s size?
- How much capital do you need?
- What is the nature of your business growth plans?
- How much control do you want to have?
How To Raise funding for Start-up Smoothly?
There are many ways to finance a business:
1) Personal investments
Many individuals or entrepreneurs are often skeptical about investing their savings in their startups. However, it is a dominant strategy to kick-start your business without the wait. It has its cons as well.
- You might have other liabilities like loans for the unemployed.
- You might exhaust your rainy day or emergency funds instead
- Your lifestyle and budget might get affected as a result
Thus, evaluate your circumstances before draining the funds you have in hand.
2) Business loans
Many high-risk banks offer business loans to help companies grow. The banks can be risk-averse. It means they might not be willing to fund a startup in its initial stage, as mentioned earlier in the article. But you can surely go for startup loans in the UK.
What will you need to apply for a business loan?
You will need to show that you are ready to invest and afford the repayments.
For filing a business loan, you will need:
- A well-crafted business plan
- Clear sales projections
- Cash-flow forecast
- Accounts and tax returns
Because entrepreneurs struggle at the initial stage of business to secure funding from the bank, startup loans are a great option to secure immediate funding for smooth business operations. It is especially favourable for a new business.
3) Small Business Grants
Before seeking startup business loans, you can check out the small business grants hosted by the UK government for startup companies specializing in innovation, from the arts to technology.
Grants such as Innovate UK Smart offer financial help to startups working on ground-breaking inventions and the potential for expanding the commercial base.
One can Google out the local business grants as well available in the particular area. for instance, you may grab a £500,000 finance at a 0% interest rate! Find out and check the eligibility requirements.
To get the grant, you will need to provide:
- A detailed project description
- Explanation of the benefits of your business idea/ project
- A detailed plan with the pricing strategy
- Details of relevant experience and background on key managers
- Application forms
The successful buying of grants depends on certain parameters:
- Significance of the business
- The approach of the business
- Innovation in the business idea
- Assessment of expertise
- Requirements for grant
The issues where a business might lose on securing grants include:
- Irrelevant research work
- Inappropriate geographical location
- Applicants failing to communicate their ideas well
- The business proposal does not base a strong rationale
- Unfocused or diverted research plan
- Unrealistic business goals or amount of work
- Unmatched funds
Keep these parameters in mind when applying for startup grants in the UK for business growth.
4) Venture Capital
Venture Capitalists might not fit every startup funding category because they mainly rely on promoting technology, communication, biotechnology, and innovative startups through funding. Venture capitalists take equity in the startup company they see potential in.
They expect a huge spike in business as soon as it enters the competitive landscape. While seeking venture capitalists for your business, look for venture capitalists having relevant experience and history and how they can bring knowledge and progressive ideas to the table for the benefit and growth of your startup.
However, venture capitalists seek to gain and recover their investment within 3-5 years. So, if your product will take longer than that to make a space in the market, then venture capitalists might not be an option for you. It is preferable for startups in the intermediate stage.
5) Angel Investors
Angel investors are wealthy individuals who operate independently and invest directly in a business idea or startup.
They are often leaders in their field and contribute their expertise, contacts, and, all the more, their technical knowledge and expertise over management. Angel investors invest up to £100000 at the early stage of a startup.
In exchange for investing money in the startup, they buy the right to company management and operations decisions. In other words, it ensures a seat on the board of directors and access to the company’s transparency.
Angel investors try to keep a low profile, and thus meeting them is to require a delightful task.
What is the difference between angel investors and venture capitalists?
|Angel Investors||Venture Capitalists|
|Invest their hard-earned wealth or money||Invest money from a fund of investors|
|Invests at the early business stage||Invests in a nearly mature stage business|
|Take a smaller percentage in the business||Take nearly 20% in a business|
|Small budget||Large budget|
|Support through mentorship||Support through proactive participation in business like board membership|
Crowdfunding is one of the most popular ways to attract finance for a startup in the UK. Besides raising money, crowdfunding generates publicity about a business or promotes it. Therefore, it helps gauge interest in a product and develop it as it grows. Crowdfunding can be differentiated into 2 types:
- Consumer-oriented crowdfunding
- Investor-focused crowdfunding
Many online platforms like Kickstarter offer ways to ensure a good number of guaranteed sales before the product is manufactured.
It grants you the capital you need to scale up your startup off the ground. But you don’t have to give the company a share in this. Hence, just create a pricing structure in such a way that it covers all your advertising costs and hidden costs of producing the backers’ rewards.
What if you could gather capital by turning your supporters into shareholders?
Yes, investor-focused crowdfunding helps you attain that.
It is great and ideal for startups that aren’t product-based or small companies that need to raise a good amount of funding for business expansion. These investors receive equity in your project or startup, therefore they are likely to invest more in it.
So, if you are seeking crowdfunding for your startup, then decide whether consumer or investor-oriented crowdfunding will suit your business requirements.
|Pros of crowdfunding a business||Cons of crowdfunding a business|
|Ability to generate a good amount for the unique and progressive idea||Only a handful of crowdfunding appeals get successful|
|Help you build a large audience, a potential audience that is eager to get the product once it is out.||Walk by etiquette to provide a thank you gift to all your customers interested in the product. Hence, You may be required to host a product giveaway.|
|Helps you raise business awareness||Needs you to invest more without any hope of recovering the same amount or more|
|Involves less paperwork||Requires time and effort to create a campaign that is strong enough to generate the needed funds for the startup|
7) Peer-to-Peer Business loans
When it is about obtaining large funding, large banks are quite skeptical about it and don’t readily agree to provide the desired financing.
This applies especially to businesses that lack a prestigious trophy on their shelf. But other lenders help small businesses or start-ups in their beginning stages to get the funds required. Therefore, These are known as peer-to-peer business loans.
Are you worried about – how to rent with bad credit and no guarantor?
Then, a peer-to-peer business loan is an answer. Because of this, you can borrow funds with a poor credit score as well.
For example, Funding Circle was the first peer-to-peer lending in the UK, which connects a small group of investors directly to the mushrooming startups in the country that need immediate cash. Therefore, the startups are given immediate access to cash up to £ 5,00,000.
|Advantages of peer-to-peer lending||Disadvantages of peer-to-peer lending|
|P2P sites offer more attractive interest rates than other financial institutions.
The borrower would have to pay an additional fee apart from interest on the loan.
|The borrower would have to pay an additional fee apart from interest on the loan.|
|Can secure funds with a low credit rating.||Getting money back in mid of a loan agreement could prove challenging.|
|You can borrow money for a wide variety of purposes such as business loans and other emergencies.||If you cannot pay the loan, you may not receive the same protection as a result the bank may sue you.|
As mentioned previously, each option here has advantages and disadvantages. Choose the option that you find comfortable with struggling with and hit the business funding goals.
While a plethora of options makes it easier to get started with startup funding, it is essential to track the financial help the business needs and the risk-management approach towards obtaining a grant or funds for business.
Prepare your business for fundraising with good corporate governance and ensure fiscal discipline in the long run. Which of these fund-raising options are you going to adopt for your startup? Comment.