Starting A Business – Access To Finance

In the latest of our series of articles drawn from the Essential Guide To Starting A Business: Veterans Edition, published by X-Forces Enterprise in partnership with British Business Bank, we turn our attention to accessing finance.

You may need funding to start your business, for which you have several options but before accessing finance, be clear about why you need it and how you will spend the money.

Most funding providers require a Business plan, cash flow forecast, and other documents so it’s a good idea to get these ready before applying for finance or pitching to an investor.

If you decide to take on debt funding, you need to make sure you will be able to pay it back. Some of your funding options include:

Business Loans – Secured and Unsecured

A loan is funding from a lender that you pay back over time with interest. There are two types of loans – secured and unsecured.

An unsecured loan doesn’t require an asset as security and, if you have a good credit history, can be quick to access. Interest rates for unsecured loans tend to be higher though, and new business owners often find them hard to access because they require a trading history.

A secured loan requires assets that you own, such as a property or equipment, as security. Secured loans often give you access to larger amounts of funding than unsecured loans, a longer period to pay it back, and smaller repayments. Disadvantages include your property that you put up as security against the loan being at risk of repossession if you don’t keep up with repayments and secured loans having a slow application process due to property valuations and other legal requirements.

Start Up Loans

Unlike many loan providers which require business owners to demonstrate a good trading history, Start Up Loans lends to businesses that are not yet trading, or have only been trading for up to 36 months. The scheme provides government-backed unsecured personal loans of between £500 and £25,000 with a fixed interest rate of 6% a year. The repayment term is from one to five years, and successful loan applicants also receive free mentoring.

Grants

A grant is funding that you don’t have to pay back. They are often provided for specific activities such as starting a business, purchasing equipment, and training. Some grants are match-funded which means you need to provide a proportion of the funding yourself. Grants can be complex to apply for, and each may have its own requirements and criteria.

Crowdfunding

Crowdfunding is when a company uses an online platform to attract finance from the public and investors.

On equity crowdfunding platforms, such as Seedrs and Crowdcube, small business owners sell shares in their company in exchange for funding. On rewards-based crowdfunding platforms businesses provide rewards, such as a product, instead of equity. Platforms include Kickstarter and Crowdfunder.

Crowdfunding can be a great way to raise awareness of your business and attract funding, but it can be time-consuming and you may not end up raising the full amount of money that you require.

Angel Investor

An angel investor is a type of investor who provides funding to a business in return for a stake in the ownership of that business and is a form of equity funding. Other types of equity funding include venture capital and private equity, but angels are most likely to invest in very early-stage businesses.

Angel investors are high-net-worth individuals who usually have business experience which means many are happy to provide advice and make use of their personal networks as well as financial backing. Angel investors look for start-ups with a strong potential for growth and high return on investment.

Next Steps

Discover all you need to know about accessing finance in our Essential Guide To Starting A Business here.