Many young and aspiring entrepreneurs are coming up in the UK who are starting their own business by quitting their 9 to 5 jobs. However, raising money for a start-up business can be challenging due to such stiff competition among the budding start-up space in the country.
Every entrepreneur knows the importance of money for any business and cannot run their business after a certain point in time. This blog will introduce readers to different modes of financing for start-up businesses.
There are direct lenders offering loan for single mothers and start-up founders to foster a culture of innovation in the country and continue with their R&D efforts. These are mostly unsecured loans for which the borrower does not have to pledge any asset as collateral against the loan.
You don’t have to produce any guarantor to represent him to be eligible for the loan. These loans come with an instant decision and once approved, the loan amount is transferred to borrower’s bank account in minutes.
Let’s now look at start-up financing in detail and know about different sources of funding. Here it goes:
Start-up Funding Process
Start-ups are usually cash strapped in the initial stage of their starting when their cash at hand is typically low even to survive for a year without external support. Several sources of funding for a start-up business are further discussed in detail in this blog. However, getting the initial funding is a daunting task for start-up owners as they need to meet several people and institutions to raise money.
Every time they need to pitch their business idea and the value they are creating for their customers and the competitive advantage they have. You also have to present your vision for the next 5 or 10 years and plan to achieve the goals you have set for yourself.
Your company’s finance department has to do an internal assessment of how much capital you need to raise based on their projected cash flows and current cost structure. You have to present this calculation and numbers to the investors you are approaching for money.
Sources of Start-up Funding
There are several funding sources for a start-up business discussed below and their merits and demerits. Here it goes:
Friends & Family
This is one of the most common financing sources, and many entrepreneurs initially resort to this as they turn to their near and dear ones to help them set up their business. They can borrow a small amount of money from their family, colleagues, friends, neighbours etc.
This is also one of the most suitable forms of financing as repayment terms, the tenor is highly flexible, and in many cases, there is no interest on this money. The flip side is that borrowing money from the people you know could ruin your relationships with them if you fail to repay on time.
Thus, consider those before borrowing from them.
Several commercial banks in the UK offer loans like provident and business loans to start-ups having strong financials and a robust business plan.
However, if you or your company’s credit score is not up to the mark, these banks would reject your loan application, further exacerbating your credit score.
The advantage of this mode is that you get lucrative interest rates without dilution of equity, but the disadvantage is loan processing is a tedious process.
This is one of the famous modes of financing being used by myriad companies globally, let alone in the UK. In this mode, you collect a small amount of money from several people online in return for society’s benefit.
Some investors lend you money in the form of peer-to-peer lending like a standard loan, or they take equity in your start-up in return for the money lent. The advantage of this mode is you pool a large amount of money from several people, but the downside is the time and effort employed in marketing your business idea as it is a time-consuming process.
Venture Capital/Private Equity Investor
There are several VC/PE investors and even companies who invest money in start-ups and in return take board position in that start-up along with equity ownership.
This is a famous form of start-up funding. It is because start-ups get a significant amount of money from a single source which is enough to keep it running. These investors want to help these young companies become big with their innovative idea and product, and these investors get rich.
The advantage of this method is that business gets money and expert mentoring from these investors. Still, the disadvantage is that your control over the company will dissolve as investors take equity ownership.
Many government schemes and funds for innovative start-ups and small businesses are working towards society-building and its upliftment. These government grants either provide money to the selected start-ups, or they get tax rebate and incentives.
The best part about this mode of financing is that you don’t have to repay anything to the government, but the demerit is that you now will have to meet certain expectations and requirements set by the government.
These are usually the payday loans offered by different direct lenders present online to help start-ups bridge their working capital shortfall, boost their cash reserves for a new project, or invest in its research and development.
There are many lending institutions offering loan for single mothers and unsecured start-up loans.
This method’s advantage is that the loan process and approval is super quick, but the disadvantage is exorbitantly high-interest rates.