A guide to the different types of funding available to UK small businesses

Raising capital can be momentous occasion, it can be personally rewarding and self-validating, it can be a euphoric, empowering and memorable experience.  It can also be exasperating, stressful, upsetting or just plain terrifying.  It does however come as something of an inevitability on the road to startup success.

Like it or not, there’s only so far bootstrapping will take you.  The sooner you understand your fundraising options the better.

There are many ways to fund your growth plans, so if you’ve strapped your last boot, here’s a handy guide to the different funding options on (or near) the table.

The Royal Bank of Me

Charity begins at home.  An increasingly popular option. You can fund your startup with your own savings (or by moonlighting on the salary  circuit).  Typical self funded business kick off with a five figure capital investment that can either be startup capital or loaned to the business and repaid at a later date.

On the bright side…
You keep total control of your company and create an epic start to that bestselling autobiography once you make it!

Tax relief on the investment can be well worth exploring: https://www.gov.uk/guidance/venture-capital-schemes-apply-for-the-enterprise-investment-scheme

…on the shite side

With 80% of businesses failing within 3 years, low success rates means it is generally not advisable to remortgage family homes to fund business ventures.  As a result, personal investment options are rarely enough to fund significant growth.  And, if everything goes belly up, you could be left without a shirt on your back.


Family and friends (and the occasional fool)

You may be able to borrow, or raise funds in exchange for equity, from family and friends.

On the bright side…
With a close relationship and mutual trust this can be the fastest funding process available.

…on the shite side

This is a truly terrible idea that rarely ends well.  Relationships quickly fray when large sums of money are involved and things aren’t going to plan.  Never mix business and friendship, especially if your funding partner is an investment newbie with little support, limited advice and no network to offer you. 

Startup loans

There’s a wide choice of loans available from banks, local authorities, government organisations and small business associations.

On the bright side…

You know exactly where you stand: terms and conditions are clearly defined and the interest is usually fixed. You’ll need to define your USP, carry out due diligence and create a thorough business plan to access your loan – and that’s no bad thing.  Nor is keeping your equity.

…on the shite side

It’s hard to get a loan without some firm of market validation and proof of concept – promising sales and earnings reports are also needed. You may be limited in how you can spend the money you borrow.

Larger loan values will require security such as personal property to collateralize the loan. Making it a risky play for those with dependent families. 

Grants

There are quite literally thousands of grants popping up all the time via national and local government schemes, startup competitions and other awards.

On the bright side…
You do not have to pay the money you receive back or give away any equity: it’s free money. Securing a prestigious grant can also be used in the future marketing to demonstrate the potential of your business to investors, partners and prospects.

…on the shite side
Although there’s no financial cost to obtain this money, there ‘s still a price to pay.  Applications can be time-consuming, the award process arduous and there’s no guarantee of success.  The hoops you jump through don’t stop should you strike lucky: you may have to spend the money on specific projects or aspects of your business or live up to other commitments made min the heat of the pitch.  Grants are also usually far smaller than expected leading to most grants simply deferring a need for alternative funding.

 

Angel funding

Give your business wings thanks to an affluent individual who is prepared to inject capital into your startup (in exchange for equity or convertible debt).

On the bright side…
Angels are definitely on your side: they are not risk-averse and will be passionate about your business. They offer capital, support, guidance and a network you can tap into.

…on the shite side
Angels can feel like a business partner that doesn’t understand personal space.  Too much involvement can leave you feeling undermined and constrained rather than liberated.  You lose equity for sure, but you can also feel like you’ve lost control.  Give away too much and you actually have lost control. 

Venture Capital funding

VCs are your best bet for finance to scale your business and achieve long-term growth. Available from Early Stage to Series A and beyond, they can inject very large amounts of capital into businesses they trust.

On the bright side…
Compared to an angel’s wings, VCs can offer you a turbo-charged jetpack injection of capital. Plus, access to global networks, world-class mentors and many other resources you need to scale and grow your business.

…on the shite side
If angels can occasionally tread on toes, VCs have the power to put their foot down.  Equity and control are now firmly shared and those big decisions no longer yours alone.

VCs are good at what they do and (among other things) negotiate for a living.  Many small business owners find themselves diluted out of relevance and simply lose interest in running what has ultimately become somebody else’s business.  Be careful to retain a shareholding that will keep you motivated for years to come, including one or more further fundraising rounds.

 Reward-based crowdfunding

Online crowdfunding platforms, like Kickstarter.com, can finance your startup – particularly if you are looking to fund a hip new B2C venture with trendsetting potential.

On the bright side…
There’s (optionally) no equity loss, so you’re still firmly in the driving seat.  Plus, you get the chance to test demand, reach an audience, benefit from feedback and raise awareness.

…on the shite side
It’s still a roughly 50/50 split between those who invest in marketing and achieve their funding goals and those that don’t.  The winners tend to be those with the skill, understanding, creativity and luck to hit that viral sweet spot.  Material such as demo videos can quickly increase costs and successful listings are rarely sub $5k. 

Equity crowdfunding

A different way to leverage the clout of the crowd. Here you gain funds by giving away small bits of equity (in the form of shares) to many people, rather than just the one angel or VC.

On the bright side…
You will still retain a large amount of ownership and control. And your business will be validated by ‘the people’ rather than the investment establishment (which proves the appeal of your concept).

…on the shite side
You lose all that experience, all those networks and all the sharply, focussed support that angels and VCs bring to the table. Equity crowdfunding is time consuming and competitive: again, the viral video and smart, savvy startup tends to sweep the wins under lesser mortals’ feet.