Business Fact Sheets

Finance and banking

Funding
- Financing your business through grants
- Finding the money to start a business

Funding

Financing your business through grants

There are many ways of funding a new business, including using your own capital or drawing on existing assets like property. However, there are also business grants and awards, which could give you the capital you need without risking your own money.

There are many types of grant, for example for a specific project or research. There are also government funds available for training and development in assisted areas.

Grants and awards are particularly appropriate for:

Business start-ups
Younger people in business
Businesses in urban areas with below-average employment levels
Businesses in rural areas
A business which has a specific project it could not otherwise undertake.

You can get information from local authorities, the National Enterprise Network (www.nationalenterprisenetwork.org), the Skills Funding Agency (www.skillsfundingagency.bis.gov.uk) and Business Link (www.businesslink.gov.uk)

You should also undertake your own research to find more obscure sources of grants. The internet is a good resource for this.

Other resources for government grant initiatives include:

BIS - the Department for Business Innovation & Skills at www.bis.gov.uk

BIS drives growth through work including investing in skills, reducing regulation, promoting trade and helping people start and grow a business.

The Prince’s Trust at www.princes-trust.org.uk

Are you aged 18-30, unemployed, have an idea for a business but can't raise all the cash you need from anywhere else? The Prince’s Trust could help you get up and running.

European funding

Funding for research and development is available through a number of schemes including the European Regional Research and Development Fund.

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Finding the money to start a business

There are many ways to fund a business, and each has its own risks, advantages and disadvantages. Below are some of the ways you can secure funds for your company.

Using your own assets

If you have capital such as savings, or equity in your home or pension, you can use these to finance your business. If you want to raise funds from a lender, they may want to see you invest your own capital first.

Be very careful when using your home or other essential asset to finance a business. Consider what the loss of your property would mean to you and your family, and build mortgage repayments into your business and financial plans. Losing your business is bad enough, but losing your home is heartbreaking. Protect yourself with insurance and seek professional financial advice before releasing equity. You can also use a mortgage against a new property such as business premises to fund your business, by overborrowing.

Borrow the money from friends

Many people fund their business with goodwill loans or investment from friends or family. It’s a great way to secure capital and could mean a nice return for them in interest or dividends when your business blooms.

However, you cannot risk personal friendships and relationships over something like money, so protect your interests and theirs with proper documentation, outlining how much you are borrowing, under what terms, and how much interest is payable. If necessary, seek professional advice to help you draw up this document so all parties are aware of the terms of the deal.

Ask your bank

There are two ways to borrow from a bank: overdraft, or loan.

An overdraft is a quick fix if you are in a tight spot financially. The bank will let your business borrow a fixed amount without notice and you pay interest daily. The advantage is that you only pay interest on what you borrow, so you can use it as a flexible cushion for difficult periods. However, it is an expensive way to borrow and should not be used as a long-term financing option.

A bank loan is an excellent way to raise capital but with banks have tough criteria in place for lending to both new and established businesses. You can find out more about alternative sources of funding from the start-up service section of the Business Link website (www.businesslink.gov.uk) or from the business support section of the Growth and Improvement Service at www.improve.businesslink.gov.uk/resources/business-support-finder

However, if you can prove a steady cash flow, your bank may offer you a small unsecured loan, but you will need to make the monthly repayments regardless of how your business is performing.

Use your credit card

Credit and charge cards are a flexible and convenient short-term method of paying bills or buying supplies, but can be an expensive way to borrow if the full balance is not paid off monthly. You are likely to write fewer cheques, which will reduce your banking charges, but the APR of most credit cards means expensive interest repayments if you can’t meet the whole amount.

Find a venture capitalist

Venture capitalists (VCs) are professionally-run fund management companies who invest in your company in return for shares and a say in the running of the business (usually in the form of a seat on the board).

Investors demand hefty minimum returns of between 30% and 40% per annum over five years and will be looking for new opportunities in proven markets, so you need to ensure your idea is a viable and dynamic one.

Business angels

A business angel is a private individual who is willing to provide funding in a small business in return for shares in your company (and therefore a share of the profits). Many business angels are a great source of wisdom and business knowledge and are more like an informal partner than an investor. To consider your business attractive, they will want to see a comprehensive business plan and evidence that your business is viable.

Talk to your local Business Link for more information on how to attract a business angel.

Grants

There are many different types of grant, but many are difficult to get so you will need to do your homework and prepare a good business case. Your local Business Link can help with information on the grants you might qualify for.

See the factsheet “Financing your business through grants“ for more information.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

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