Financing a Start Up Business: Tips for Success
Starting a business is undoubtedly a challenging task, and one of the most significant challenges that face you as an entrepreneur is finding funding for your business idea. There are many options to finance your start up including personal savings, loans, grants, crowdfunding, and venture capital. Some government schemes are helpful to entrepreneurs such as the Start Up Loan Scheme and should be considered when you are thinking about how to finance your start up.
Exploring Types of Start-Up Financing
There are various types of start-up financing options available to you and selecting the right ones for you is vital. It’s important to explore all these options and choose the one that suits not only your start-up’s needs and goals but also ensures you are only taking on as much risk as you are willing to.
Personal Savings
Using your personal savings can serve as a valuable source of funding for your start-up. If this is a project you have planned towards (or are beginning to plan for) then you may have began setting aside some funds to get you started. If you are planning on starting a company that requires very little capital and you are sure that you will gain clients quickly then this may be the best option for you as both you and your business can remain debt free upon starting up
Loans & Grants
When financing a start-up business loans and grants are a classic method of raising funds. Business loans offer interest rates and repayment schedules that can be compared among different lenders in order to ascertain the best deal for you. On the other hand, grants are non-repayable but are reliant on you undertaking work that either an organisation or the government has deemed to be worth investing into. Researching grant opportunities that align with your start-up’s industry can help you find funding without burdening yourself with debt. However, many industries will not have available grants and therefore a loan may be the best option. Understanding the application process for both loans and grants is vital to secure the necessary funds for your new venture.
Understanding your business structure and what that means for your loan application is crucial. Different business structures incur different levels of liability and some may affect your personal credit history and future funding options. Talking to an accountant may help you decide what the best route to take is when deciding how to operate as to minimise not only your tax liability but your liability for the business.
Crowdfunding
Crowdfunding platforms offer a unique opportunity for start-ups to raise funds from a wide and varied audience. By creating a compelling campaign and offering attractive rewards, you may be able to attract backers to your project. Leveraging the power of social media and online networks can also help to promote your ideas and vision effectively, which will lead to better engagement and potentially greater funding. Crowdfunding can provide a valuable alternative to traditional financing methods and allows start-ups to tap into a larger pool of potential investors.
Venture Capital and Angel Investors
Venture capital and angel investors are another avenue for securing funding for your start-up business. These individuals or firms are experienced in investing in early-stage small businesses in exchange for equity.
The benefit of angel investors is they often offer mentorship and share their experience in the world of business which can provide you with invaluable insight into growing your business and successfully getting your idea off the ground.
UK Start-Up Loan Scheme
There is a government-backed initiative designed to provide financial support to SMEs in the form of a loan and guidance with your startup. To be eligible for this scheme, you need to be resident of the United Kingdom over the age of 18 with a viable business idea that has been fully trading for less than 36 months.
The application process involves submitting a business plan and undergoing a personal credit check. If successful, you can receive a loan between £500 and £25,000 with a fixed interest rate (currently 6%) which has a repayment period of up to 5 years. In addition to the loan there is also 12 months of mentoring as well as support and guidance in writing a business plan to help your business succeed.
This scheme has recently passed the £1bn mark having provided support to over 100,000 small firms across the country and continues to grant applicants startup loans. These are available for both sole traders and limited companies so you are not excluded based on the structure you chose to operate within.
What to Consider When Looking to Finance Your Business?
There are important considerations you have to make before committing to some methods of raising funds, not planning accordingly could lead to you losing equity in your own business, being unable to service the debt or having to take out further loans at less favorable rates.
If you are considering a loan you may be impacted by future rises in the base rate which will result in you having to pay more for your funding. Inadequately managing for this risk could lead to cash flow problems and cause you problems down the line. Crowdfunding also has drawbacks in that many of the platforms people use will take a percentage fee and also only release the funds conditional on you achieving certain targets.
Understanding these limitations before acquiring funding is important so you can plan to mitigate any risks. A vital part of this is deciding if you should operate as a sole trader or incorporate into a limited company.
Sole Trader Vs Limited Company - Does it Matter?
Choosing the right business structure for your business is important and we would always recommend talking to an accountant in order to get a professional opinion on the most tax efficient and lowest risk strategy for you. Your willingness to accept risk as well as the potential size of your business are vital things to consider when setting up a new business.
What is a sole trade?
Someone who is a sole trader is someone who is self employed and they are treated as the same single entity as their business. What this means that as a sole trade business owner you are responsible for any debts that the business incurs so you could lose your savings or even your home if things go badly.
On the other hand, being a sole trader is more flexible and easier to set up and run, compared with a limited company. Essentially all you need to do is to keep a record of your income and expenditure and then report that on a self-assessment tax return each year. However, operating as a sole trader can result in you paying more tax than the limited company route. You may also find that some clients will not want to work with you as they prefer to deal with Limited Companies.
What is a Limited Company?
Unlike a sole trade, if you set up a limited company, then the business is a separate legal entity. This means that you, as a director of the company, have limited liability if things go wrong, something that can provide great comfort, as directors and shareholders cannot be pursued personally for company debts.
Limited companies pay corporation tax on profits that it makes unlike sole trades which pay income tax. The tax regime of limited companies can be more efficient that sole trades and it also offers greater flexibility for example allowing you to choose when you draw any profit out of the company.
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