Friends and family
The people closest to them are the first source of funding for many small business owners.
Your nearest and dearest may be willing to support you by providing money to launch or grow your business. You could offer them a share of the company or free products 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.
There are a multitude of funding schemes offering grants to small businesses. They have a wide range of eligibility covering everything from founders looking to turn an idea into a business to established companies wanting to innovate or expand overseas.
The big advantage of small business grants is that it’s money you don’t have to pay back, but it can require a lot of research to find them and they can be complicated to apply for. There will also likely 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 £5,000 a grant, you’ll have to provide another £5,000 yourself.
You can find small 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 small 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
Launched in 2012, 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 6.5%. 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 two 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 meet the following criteria:
- You’re 18 years of age or older
- You’re a current UK resident
- You’re starting a new business or have been trading for up to 24 months
- You’re unable to secure finance from other sources (self-declaration is ok)
- 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 small businesses. You can borrow from established high street banks and new ‘challenger’ banks.
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 can be a good option for short term expenses and cashflow management but you shouldn’t rely on it for long term funding. In that instance, a business loan is usually a better option.
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 depending on things such as your business’ profits, how long you have been trading for and your credit history. You should shop around and use price comparison sites to find the best deal.
It is advisable to settle your bill in full each month so you avoid interest.
Crowdfunding has exploded in popularity in recent years. It allows you to pitch your business and consumers or investors 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 such as one of your products.
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.
Key to hitting your reward or equity crowdfunding target is an engaging video pitch and lots of promotion. You can spread the word by 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 small 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.
Depending on the platform, you can borrow anything from a few thousand to millions of pounds. 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.
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. They invest in pre-revenue, pre-profit and profit-generating businesses.
Angel investors are helped by the Seed Enterprise Investment Scheme (SEISS) and Enterprise Investment Scheme (EIS) which provide tax relief.
You can find angel investors through your personal network, using LinkedIn, attending business events and contacting members of UKBAA.
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.
VC funds are provided to a business in rounds starting at the seed stage before moving on to series A, B and C. VCs are also helped by SEISS and EIS.
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).
Date published 9 Feb 2022 | Last updated 28 Feb 2022This 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.