Eight ways to fund your small business

Friends and family

The people closest to them are the first source of funding for many business owners. Your nearest and dearest may be willing to support you by providing money to launch or expand your business. You could offer them a share of the company or pay interest in return.

Be careful if you go down this route as it could damage the relationship you have with your friend or relative. Both parties should be very clear about what’s being agreed and whether the funding is a gift, loan or investment. Consider drawing up a formal agreement and seeking independent legal advice.

Grants

There are many funding schemes available offering grants to businesses. The main advantage of business grants is that it’s money you don’t have to pay back. It can require a lot of research to find business grants that you may be eligible for and they can be complicated to apply for. There could also be restrictions on how you can use the money and you might be required to match fund the grant. For example, if you’re given a £5,000 grant, you’d have to provide another £5,000 yourself.

You can find business grants using the Government’s business finance database and by contacting your local council. There are also the following country-specific websites:

• England: Growth Hubs
• Scotland: Scottish Government’s Find Business Support
• Northern Ireland: Invest Northern Ireland’s business support finder
• Wales: Business Wales’ finance locator

Other organisations offering business grants include:

• UnLtd, the foundation for social entrepreneurs
• Prince’s Trust
• Innovate UK
• National Lottery Heritage fund
• Arts Council England
• Creative Scotland

Start Up Loans

Start Up Loans is a Government-backed funding programme that provides personal loans of between £500 and £25,000 to start or grow a business.

The loan has a fixed interest rate of 6%. You have one to five years to pay it off and there’s no early settlement fee.

To apply, you need to have started (or plan to start) a UK-based business that is less than three years old. You will need to submit a business plan and cashflow forecast as part of your loan application. Successful applicants receive 12 months of free mentoring as well as the funding.

To be eligible to apply for a Start Up Loan, you must also meet the following criteria:

• You’re 18 years of age or older
• You’re currently a UK resident
• You’re unable to secure finance from other sources
• Your business is based in the UK
• You have the right to work in the UK
• Your type of business and reason for wanting the loan is eligible under the terms of the scheme
• You can pass the relevant credit checks and afford to repay the loan

Bank loans and overdrafts

Traditional business bank loans remain one of the most popular sources of external finance for businesses. Each bank has its own eligibility criteria, but they typically like to see businesses:

• with a good trading history and proven track record
• able to demonstrate an ability to repay the loan
• with a good credit report

New start-up businesses may find it harder than established businesses to get a loan, but it’s not impossible. The bank will consider your personal credit record. 

An overdraft is a line of credit you agree with your bank that you can access when you need extra money beyond your available funds. It may be a good option in the short term but you shouldn’t rely on it for long-term funding as it can be expensive. In that instance, a business loan is usually a better option.

Credit cards

Just like a personal credit card, a business credit card provides an agreed amount of credit you can use to make purchases and payments. They can be useful for managing cashflow if you are waiting for a client to pay an invoice and to access funds at short notice.

Interest rates and credit limits vary and you should shop around and use comparison sites to find the best deal. It is advisable to settle your bill in full each month, so you avoid interest. 

Crowdfunding

Crowdfunding has exploded in popularity in recent years. It allows you to pitch your business to consumers and investors who give you money. The types of crowdfunding are:

Reward crowdfunding: Using websites such as Crowdfunder and Kickstarter, you can ask for financial backing in return for a non-financial reward. 

Equity crowdfunding: This method involves giving away an equity stake in your business in return for the money. It is usually a better option than reward crowdfunding for businesses seeking large amounts of funding. Popular equity crowdfunding websites include Seedrs and Crowdcube. You can use the Seed Enterprise Investment Scheme to attract investors who will receive tax relief.

The key to hitting your reward or equity crowdfunding target is an engaging video pitch and lots of promotion. You can spread the word using social media, public relations and email marketing. You may not receive any money if you don’t hit your target.

Peer-to-peer loans: This type of business crowdfunding is a loan that you borrow from multiple investors. You don’t need to give away equity or a reward but you do need to pay interest. You can use websites such as Funding Circle and Lending Crowd to be matched with investors.

Bear in mind that interest rates might be higher than traditional business loans and lenders conduct credit checks which can impact on your credit score.

Business angels

Angel investors are wealthy and successful individuals who invest in early stage businesses in return for an equity stake. To get one on board, you need to pitch your business and explain what’s in it for them. Think Dragons’ Den without the cameras!

Angel investors provide funding, but you also benefit from their mentoring, experience and contacts.

According to the UK Business Angels Association (UKBAA), individual business angels invest between £5,000 and £500,000 in a single company in return for 15-30% equity. They expect a good return on their investment, typically 30-40% annual return over three to 10 years.

As well as investing in a business as individuals, they also operate as a group of several investors which opens your business up to more funding. You can find angel investors through your personal network, using LinkedIn, attending business events and contacting members of UKBAA.

Venture capital

Like business angels, venture capital investors (VCs) back early stage businesses but they invest larger amounts and expect a significant return on their investment. This means they typically look for businesses with high growth potential and ask for a bigger equity stake.

Rather than investing their own money, VCs use funds from large institutions such as private pension funds. They usually take a seat on the business’ board.

Venture capital investors can be hard to track down. Ways to find them include asking for a referral from another entrepreneur, investor or lawyer and contacting the British Private Equity and Venture Capital Association (BVCA).

How we can help

TaxAssist Accountants has experience with businesses from start up and through expansion and diversification. If you’re looking at raising finance for your business, speak to our team today and we can support you on your way. Call our team on 0116 2966 100 or use our online contact form to arrange a face to face meeting today.

Date published 9 Feb 2022 | Last updated 10 Oct 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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