June 14, 2018 0

Finance/Funding Guide for growing UK Startups

Finance/Funding Guide for growing UK Startups

A small idea can turn into a flourishing business if the right financing options are available at the right time. The start-up culture is gaining rapid market traction across the UK, with small businesses taking wings and significantly contributing to the region’s economy. Arranging financers who would like to invest in a new business idea is one of the most intriguing challenges start-ups face, especially during their initial years.

According to the Department for Business, Innovation and Skills, on an average, 400,000 new businesses start in the UK every year. Out of these, one third stop operating within three years, and the lack of cash has been found to be the major culprit.

When small businesses are starting out, they do not have any proven market expertise or acumen; therefore, traditional lenders or investors are usually hard to come across. Hence, they resort to measures such as selling their personal assets, borrowing against their home, taking loans from friends and relatives and sometimes even dipping into their retirement funds. All of these are extremely high-risk undertakings, which could also lead to insolvency and even a small hiccup could leave the startup owners grappling for dry land, as situations could easily turn tricky.

There are several other options such as business angel investors, startup loans, business grants and crowdfunding for startups that allow you to raise funds for your business. Through this article we try to combine all such options for the ease of reference to start-ups.

Financial Support by the UK Government

The UK government has set up several provisions to help start-ups grow and prosper. With the number of UK-based start-ups growing, the government is introducing new plans and financing options to make them more accessible to small businesses. However lack of awareness for such options is another challenge that the UK government is trying to fix. Unfortunately even with these government efforts, many start-up owners have no clue about the facilities available to them.

Business Angel Investors

Business angels are considered to be high-net-worth individuals who make equity investments in potential business ventures. These, with their extensive industry experience are willing to invest the initial capital required for setting up a new start-up business in exchange for a certain equity share (return on the investment made). Business angels are also known to make investments in established, large firms that are looking to expand their geographic or market reach through expansion. These investments can be made personally by the angels, or they may be through an angel association or syndicate.

During the seed stage of the business, startups should expect lower amounts of funding, but if the business is at the growth stage, chances are higher that it will attract a good amount as a fund. Business angels usually do not offer all the fund in a single go but in multiple rounds. Depending on the profits made by the start-up, angles may also offer co-investment funds as a further financing option. Apart from the investments, start-ups can leverage the industry expertise of their angels to kick-start their business network. The skills and contacts that business angels bring along with their investment are extremely valuable to budding start-ups.

While angels are known to take quick investment decisions and can fund any industry, but they usually stick to the industry that they have expertise in. Therefore, it is extremely crucial to conduct thorough research to track down the most suitable angel.

Crowdfunding for Startups

In the last few years, crowdfunding has emerged as one of the most in-trend financing methods across the globe. In line with the Internet obsession of today’s generation, crowdfunding is conducted via an Internet platform. Start-ups pitch their business ideas online, and then wait for the investors’ support to pour in. Since crowdfunding does not have an upper or a lower investment limit, investors can put in as little or as much as they want.

Starting from £10 to £100,000, crowdfunding projects for start-ups can result in thousands of investors, which may even include the current and potential customers of the business. Crowdfunding has been tagged as one of the most intelligent ways of receiving financial assistance and garnering public interest.

To understand it further, crowdfunding can be defined in two ways –

  • In the first type of crowdfunding, start-ups offer rewards such as freebies, coupons, discounts etc. in return for an investment. The larger the investment, the better the rewards. The benefit offered by rewards-based crowdfunding is that the start-up do not have to relinquish its equity shares in return for investments.
  • The second type is the equity-based model of crowdfunding provides investors equity shares worth the investment they have made in the start-up. The earnings from equity crowdfunding may qualify for the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS) relief, and they are regulated by the Financial Conduct Authority (FCA). The secret to a successful crowdfunding project lies in the marketing tactics used by the start-up to advertise its business concept.

Business / Startup Loans

The UK government provisions business loans to help start-up companies fund their business growth. Currently, government-backed business loans between £500 and £25,000 are available for all most all start-up businesses. These business loans are more like unsecured personal loans, offered to the start-up owners to finance their initial capital needs. The government also offers gratis support and guidance to start-ups for building their business plan, and on selection, the qualified individuals receive free mentoring for at least 12 months.

Loan criteria – To apply for the loan, a start-up business owner should be living in the UK, should be at least 18 years of age and should have a business (or plans to start one) that has been operating for less than 24 months. These start-up loans are backed by the government and are charged at a fixed rate of 6% per annum. They can be repaid in 1—5 years and have zero application and repayment fee. 

Business Grants

The UK government also hands out business grants to new and innovate start-up concepts that have the potential to flourish in the near future. Usually, an interest is not charged on government-sponsored grants and in certain cases the start-ups do not even have to pay back the grants received.

Apart from the government bodies, grants are also offered by the European Commission, local bodies, educational universities and associations such as charities. Sponsored grants are usually awarded to business ideas that are benefitting the society at large, especially by improving the quality of life and contributing to the national economy.

Few other options

Apart from the above mentioned financing options, the Her Majesty Revenue & Customs (HMRC) has introduced certain schemes to encourage investments in startups and new business ventures via provisions for tax relief. For example, the investments received via SEIS and IES qualify for tax benefits. The same applies to investments via the Venture Capital Trust (VCT) Scheme and the Social Investment Tax Relief (SITR).

ALSO READ: SEIS and EIS Tax Relief Investment Schemes

We’d also like to share tips to secure funds

  • Do your homework well before deciding on the fund amount you plan to ask for. You will not get a fund every quarter, so if you ask less you may end up at the same place with inadequate fund. It is even more important to ask a lot than what you can get. Have enough reasons to convince the lender as to why do you need the amount you are asking for. Unless you can give a good justification the right amount won’t come to you.
  • Be ready with an awesome presentation as you will not get a second chance. How well is your presentation covering your end-to-end business info and future plans is the first thing that can impress the investor. Also equally important is how well do you know the data that is on the presentation. Your confidence and data on your fingertips can certainly get you the deal.
  • Know your stuff – your business’s worth in the market, your profits, next action plans, expected revenue after the funding. Don’t hype up the expected business growth as if the investor has done his homework better than you (which he would have) than you lose the same minute.

Recommended Reads: Finance and Support for your business by the UK Government


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