How to fund a startup: the basics
How to fund a startup: the basics
You need to fund your business before you can start producing anything, and there are many ways to do it – but where should you start?
Get your idea funded
First, work out how much money you need. It sounds obvious but there’s a lot to consider when arriving at that magic number. Work out what your operating costs will be for your first year, compare that to your projected sales, then work out the difference between the two.
A contingency plan is vital. Cash flow issues can cripple a small business, and even with a healthy turnover many businesses have to operate at a loss for some time when they start trading. This means you may need to borrow more than your figures suggest.
Work out how much funding you need
Your business plan is the best place to start, as you will have done a lot of the hard work pulling those numbers together.
You’ll need to work out a budget based on:
- Forecasts for sales and costs (on-going costs including rent, staff, stock etc.).
- Your projected cash position each month (based on the above).
- One-off costs and outlay for things like equipment (computers, tools, furniture etc.).
Be realistic in your calculations. Hope for the best, but plan for the worst. If sales are lower than your projections, or payment is slower, your costs will increase and you’ll need a decent buffer to keep going.
When will you need funding?
Once you have a figure, you’ll need to think about when you’ll need it. For example, do you need it all at once, or will regular payments be OK? The answers to these questions will impact how much you can secure and the type of financing you should apply for.
Many startup businesses can spend more than they bring in for the first 2 or even 3 years. This is because there are so many costs to start with and it takes time to establish a customer base. So you may need to consider funding even after you break even.
Have a backup plan
Of course, your startup may be a success from day one, but without contingency funds, your business could struggle to keep that success going.
For example, if your invoices are paid after 60 or 90 days, instead of 30, will you have enough to pay staff and carry on trading for those two unplanned months? If you’re launching a new product, what if the manufacturing is delayed?
Allowing for a bigger contingency than you need makes good business sense. So try and arrange all of your financing in one go – even if you don’t plan to take the funds all at once. Don’t wait until the need for extra funds becomes urgent as this could impact both your business and credit rating.
Startup funding options
There are lots of different ways to fund your startup business, from personal sources (your own or borrowed from family for example). Putting your own money in as a start point will help you attract funding from elsewhere. Investors will want to see that you are prepared to take some of the risk too.
Small business loans
Depending on how much you need, and how strong a case your business plan makes, you may be able to secure a loan, or credit from a bank or other lender. However you’ll have to provide a lot of detail and assurances that you can meet the repayments before they’ll agree.
Government startup loans
You could also look at a government-funded startup loan. There are a number of providers offering them. They’re available for amounts from £500 to £25,000, repayable with a fixed interest rate of 6% per year.
There are other schemes that offer more than just the money though. The Virgin Startup Loan is backed by government, which means that they can offer a lower interest rate than a traditional business loan. Plus, you’ll have access to free business mentoring.
Crowdfunding is growing in popularity, with some big success stories, and there are many different platforms to launch your idea. Crowdfunding is where groups of individuals and investors come together to fund a business, with each investor pledging a small amount. In return, they’ll either get a financial return on their investment, be one of the first to own the product, or receive discounts and benefits once the business is up and running.
There can be great benefits in word-of-mouth from this kind of funding, because all those who have invested will want it to be a success, and will help market your business. Depending on what the reward for the investors is however, you may have to give away a significant proportion of ownership of your business to reach your target.
Angel investors and venture capital
There are many investors who are willing to put money into a good business idea. They’ll be looking for a high return on their investment and an exit plan – such as selling the business or floating on the stock market.
There can be some great strategic benefits to be gained from this type of funding, as you’ll likely attract investment from investors with expertise in the market that you plan to sell in. With such a heavily involved investor, you might need to take their direction occasionally to keep them happy.
Startup incubation funds and programmes
A startup incubation or accelerator programme can be a really valuable process to go through, not just because of the sustained funding it provides, but also the learning and growing your business can do along the way.
Search online for startup incubators that invest in your kind of business. We invest in Founders Factory, a startup incubator and business accelerator for tech focussed businesses. If your idea is in this area, take a look and see if you can apply.
Small business grants from the government
The government has set aside money to help certain groups of people and industries get funding. Getting this funding can be tricky though, and even if you’re eligible for a grant you may have to secure ‘matched’ funding elsewhere. The one major benefit of a government grant is that you don’t have to pay it back, or give away any equity in your business. You’ll need to be very specific about what the money will be used for though.
As you might expect, the process is long and very detailed, and competition for these grants is high, so don’t bank on it as your only option.
Successful applicants will need to contribute to something specific, whether it’s a niche innovation, or to achieve a particular aim. There are some more general areas targeted for funding though, so if your business falls into one of those areas, you may have a better chance. These are:
- Energy and the environment – green-focused products or services that will improve the environment.
- Innovation and technology – businesses that help the UK stay competitive in the global tech market.
- Exports – businesses that improve trade links for the UK.
There are hundreds of grants available, so you’ll need to spend some time finding out which criteria your idea may fit into.