A guide to funding a new business

Even the most cash-generative companies need funding to start or grow. If you’re considering business finance, you need to find an option that provides the capital to suit your ambitions. You also need to ensure it has repayment terms to suit your growth and which you, as an individual, are comfortable with.

This guide looks at the following business finance options:

• Personal investment

• Loans

• Grants and government support

• Private equity

• Crowdfunding

Should I put my own money into my business?

Investing your own money to kickstart your business can be the natural first step to financing your dream. It can be quicker and easier than applying for finance.

Also, if you’re starting a new business, you need to be confident that it is going to succeed. Investing your own money is a great way to test your commitment to your concept. But is it right for you?

Pros and cons of personal investment in your own business

What should I think about before investing my own money in my business?

• Keep your pots of money separate – make sure you have a separate bank account to keep track of personal vs business funds

• Keep things simple – transfer a lump sum over to your business account rather than moving dribs and drabs

• Be careful – evaluate the risks of investing your own money before committing

• Protect your assets – make sure you won’t lose vital assets such as your house or retirement savings if something goes wrong

• Know your limits - know your personal survival budget to keep your head above water as you start your business

Should I ask friends or family to invest in my business?

Maybe, if you take proper precautions. If you have family or friends who are interested in investing in you and your business, tread carefully. There’s more than money on the line; relationships can be affected if things go wrong.

• Make it formal – put things in writing to avoid misunderstandings or disagreements in the future

• Be clear – make sure you both understand whether the money is a loan, investment or gift

Can I get a business loan from a bank?

Yes. Many high-street banks offer business loans to help companies invest and grow. However, since the financial crash in the noughties, they can be more risk-averse and often favour limited companies over sole traders.

The good news is that lots of challenger banks and alternative lending schemes have emerged to fill the gap in business finance. Like Transmit Startups and Transmit Growth Loans.

You’ll need to be able to show any lender that your business is ready for investment and you’ll be able to afford the repayments.

What do I need to apply for a business loan from a bank?

• A detailed business plan

• Clear sales projections

• A robust cash-flow forecast

• Accounts and tax returns (if applicable)

 Can new businesses get a business loan from a bank?

Yes but it can be trickier, as many banks look for evidence of past trading to assess loan applications.

If you are a new business, it might make more sense to apply for a specialist startup loan.

Startup loans:

• are a personal loan you use to finance your business

• are specifically designed for brand new businesses

Good startup loan providers can also help you:

• write your business plan

• prepare realistic financial projection

• get your business off the ground through mentoring in your first year

Check out our guide to business loans for more information.

Can I get a grant to fund my business?

It depends on what your business is. Some non-repayable business grants do still exist, but they are rarer than they were fifteen years ago.

They are usually only available for businesses that meet certain criteria, such as:

• meeting an urgent demand

• solving a problem

• improving social mobility

Applying for grants can be highly competitive and you need to be prepared to make a strong case for your business.

Remember to research eligibility criteria and consider hiring a consultant to help maximise your chances of success.

Which businesses are most attractive to grant-making organisations?

Most grants are available in one of the following sectors:

• research and development (R&D)

• employment and training

• environmental schemes

• businesses providing opportunities for young people

Who offers business grants?

Sources of business grants include:

• the government

• your local authority

• your local enterprise partnership and/or growth hub

• the EU

What is private equity?

You’ll receive a much-needed cash injection for your business, as well as benefiting from your backers’ expertise and contacts. This can help you manage and grow your business.

It's likely there will be a planned exit identified, at which point the investors will expect to have realised their return.

To attract private equity, your business should have the potential to grow exponentially over the next three to five years and deliver a good return on investment.

What is the difference between an angel investor and a venture capitalist?

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There are a number of agencies who will make introductions between businesses and potential investors. But be prepared for a change in dynamic once the business grows from your 'baby' into a full-grown firm. It is a very different set-up when you have a board of investors calling your decisions into account!

Can I crowdfund my new business?

You can. Crowdfunding is one of the newer ways to fund your business. It’s brought real change to the world of startup finance, as well as the lives of business owners who’ve benefited from it.

Crowdfunding is when people who need money post about their idea or issue online and ask investors to make a contribution towards it. This usually takes place via a specific crowdfunding platform, which helps the people build and promote their appeal, whilst taking a small cut of the money raised.

One of the great things about crowdfunding is that it doesn’t just raise money, it raises your profile too. As you circulate your appeal online, you reach people who are passionate about your product or project. They share it with their contacts and your appeal can snowball into success.

Plus, you may build an audience eager to buy from you when you do get your business off the ground. If your appeal really takes off and goes viral, you might find yourself a crowdfunding success story that raises a fortune and grabs the headlines too.

But only a small minority of crowdfunding appeals are successful. Approach the opportunity with the same care as you would any source of business finance to maximise your chance of success. Check out our blog post on how to write a successful crowdfunding appeal.