Depending on the nature of your business, you may not need much in the way of start-up capital. Take for example the services sector. The UK derives almost 80% of its entire GDP from value-added services, many of which don’t have a high barrier to entry costs such premises, stock, production, warehousing etc. On the other hand, if you need money to design, manufacture and market your new product, or for premises, equipment, or stock, you will most likely need an injection of funding.
The government has been quite bold in announcing funding for projects and businesses at the cutting edge of technology; in particular AI, biotechnology and robotics. If you are under 30 and just looking for a small amount of start-up capital, consider a government-backed ‘start-up loan’; these are for a maximum of £25,000 with a fixed rate of 6%. The scheme is delivered in partnership with several ‘delivery organisations’, including the Prince’s Trust, which are matched with the borrower (based on geography or industry), to provide a closer level of support and mentorship.
Aside from the government-backed loan scheme, there are many others to consider from banks, councils, charities, and other institutions. Many high-street banks are keen to work with start-ups who have solid ideas and a robust business plan, as long as they can demonstrate they will be able to pay back the capital have borrowed in the required time-frame.
Bootstrapping is a term used when someone starts up a business using their own capital. The venture then grows organically through sales. Businesses that bootstrap tend to start small and grow gradually, providing some significant advantages. On the one hand, you won’t have the life of the rich and famous in the early years (you will most likely be stretching every pound as far as it will go), but importantly, you won’t have the burden of high debt repayments. By allowing your business to grow organically, you can prove that your idea is working and self-sustaining which may prove very attractive to investors and/or lenders at a later date, if you consider seeking external funding to take your venture to the next stage.
Other government assistance
There are a range of government grants which are non-repayable. These are worth considering if you are starting up in the energy, environment, exports, and/or innovative technology sectors. Consider the Innovate UK and H2020 grant scheme in particular.
In addition to loans and grants, there are a range of other ways of raising money through tax breaks, including a research & development (R&D) tax credit which can see 25% of your R&D spend refunded each year.
While it might seem unnerving to seek investment from the outside world, in reality, third-party investment is often seen as less risky because there are no guarantees attached the investment. If the business fails, you aren’t required to pay the money back. However, the flip side is that you will be under outside pressure to perform and meet profit targets.
Angel investors are individuals (rather than investment organisations) who will invest their own money in return for an equity share of your business. The amount invested by angels range from £10K – 100K but can rise to £1million. Angels, unlike Venture Capitalists (VC’s), often invest in start-up companies. A crucial benefit is the angel may have experience and contacts you can tap into to help you grow, in addition to the much-needed capital they provide. And while the angel will have some say and oversight to how the business is run, this is minor in comparison to a VC arrangement, whereby the investor joins the board of the company and will demand specific returns within a small number of years.
This is a relatively new phenomenon that allows start-ups to seek money from a large number of people, usually via a dedicated internet crowdfunding platform. Often the amounts invested are relatively small, but with hundreds or thousands of investors, the total funds achieved can be considerable. There are two broad types of crowdfunding, equity-based and rewards-based. Both can be an easy way to gain investment, especially with a solid pitch. However, you will have a large base of people that you are accountable to.
You need to consider the best funding option for you given your specific business model. If you have business partners, you will need to collectively agree how best to inject capital into your start-up. If you are unsure, or if you need to discuss the relative merits of each type of funding, speak to one of our specialist commercial solicitors today. While you will be extremely busy trying to get your new business off the ground, don’t be tempted to rush a decision around borrowing or seeking investors. You may save yourself thousands in unexpected costs by ensuring any contracts sent by a lender or investor are checked to ensure they serve your long-term best interests.
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