How to fund your business idea

There’s no shortage of people who’ve had a eureka moment. But it takes more than a moment to conjure up a money spinning notion, it also takes hard work and a hefty dose of luck to make it fly. This is where careful planning comes into play. Without proper preparation, in this case a business plan, you can kiss goodbye to becoming the next Elon Musk or Karren Brady. 

Write a business plan

A business plan lays bare your strategy, explaining in detail how you’ll turn an idea into a money-maker. It should cover all aspects of a business, starting with a mission statement, which crystalises what makes your business idea so special. 

After the business plan should come the first of several sections showing how you’ll achieve your aim and how many people you’ll need to employ. 

You’ll need to explain what you’d be spending on equipment, marketing and logistics, and identify where your business will fit in the marketplace.  On this point, you’ll need to satisfy everyone, yourself included, that you know your competition and that you can get a slice of their action. 

Of course, there’s a lot more to drawing up a business plan, so be sure to research what potential investors or lenders would want and need to know. You could always also get an accountant who specialises in business startups to run their eyes over your plan before submitting it.

Where to get funding for your startup business

If you’re looking for funding, you’ll need a solid idea of where you want your business to be in one to five years. This’ll certainly be the case if you’re seeking a grant.

While this can seem daunting to an inexperienced business owner, there’s no shortage of schemes and resources available that come with copious guidance notes. 

How to get grants to fund a new business idea

Grants are a good starting place if you’re looking for funding, because you don’t pay it back or give part of your business away in return. 

Charities, organisations and private businesses all offer grants, but the largest source of them is the government. Around 70 different government grants are currently available, plus a raft of other useful government backed or promoted resources, including the Seed Enterprise Investment Scheme. Most are linked to specific fields, such as engineering, pharmaceuticals or the arts, but some are more general. 

The grants are typically paid in one of three ways:

• you get a lump sum upfront

• you get a grant of the same size as your own investment

• you’re reimbursed after spending your own money 

Local government grants and resources

Local authorities often run grant schemes, which comprise support for people trying to get their startup off the ground. These can consist of cash advances or voucher schemes, whereby you’re given coupons or credits that can be cashed in at office suppliers, training courses and the like. 

Business support networks are worth rooting out too. You might find them through your local library, university, Jobcentre Plus, as well as on social media networks, such as Linkedin. 

Free mentoring, helplines and training courses on various aspects of setting up a business regularly crop up. These may or may not be better than paid for courses – so check the small print and take a look at reviews.

Other sources of small business funding

There’s all manner of other startup business funding options, the main ones being: 

Business grants: Plenty of companies and business-focused organisations offer grants and awards to up-and-coming firms, mainly because everyone benefits from a thriving society. Leading lights in this arena include:

• UK Research and Innovation – runs a range of grants and awards covering various industries

• The Prince’s Trust Enterprise Programme – for young entrepreneurs age 18 to 30

• Grow It Award – offers funding for business ideas that will have a positive social impact

• LSE Generate – twice yearly funding awards of £20,000 to innovative ventures

• DBACE – the Deutsche Bank Award for Creative Entrepreneurs runs once a year for 18 to 30s with strong creative business plans that’ll benefit society 

Competitions: Private companies sometimes run competitions to find the best young innovators out there. This is a great way of identifying potential client businesses or even presenting a deal that would see them enter into an agreement with the winner, à la Dragon’s Den or The Apprentice. For example, Worth Capital’s Start-Up Series awards £250,000 of funding to one fledgling business a month.

Crowdfunding: As social media phenomena go crowd funding is one of the classier provisions. It’s certainly had a big impact on small businesses. Crowdfunding is ideal for attracting the interest of like-minded people all over the world. Through various platforms startups can receive a huge financial boost just by pitching their idea and waiting for positive responses. 

There are several ways crowdfunding can help you get your idea off the ground, including:

• Donations: where people just pledge some money towards your exciting idea. They get nothing tangible in return. Offered by JustGiving and Kickstarter, among others. 

• Rewards: where your crowdfunders will get something in return, perhaps  free phials of essential oils or clothes if that’s what you’re producing. Offered by Kickstarter and Indigogo, among others.

• Equity: where you offer shares on your company in return for investment. Visit CrowdCube and Seedrs, among others.

• Debt: effectively peer-to-peer lending, where you borrow money through a crowdfunding platforms and pay back with interest. See Funding Circle and The Lending Club, among others. 

A note on debt crowdfunding 

While debt crowdfunding may offer a relatively easy way to raise finances, you may find you’re paying higher than expected interest rates.

This is because your business won’t be covered by the Financial Services Compensation Scheme or regulated by the Financial Conduct Authority, meaning lenders shoulder much of the risk.

If your business fails, or you just refuse to repay your loan the lender could well be left out of pocket. 

How to self-fund your small business

If crowdfunding doesn’t appeal, you could try self-funding your initiative. Here are the main avenues open to you:

Savings and main job earnings

You could probably do a lot worse that to fund your business through savings. The chances are what you’ll lose in interest by withdrawing your money will be nothing compared to what you’d pay on some form of loan. 

Alternatively, if your business idea has mushroomed from a hobby you could keep the day job and self-fund through your salary. 

• Pros: You’re in control of your spending, and shouldn’t end up owning others if it all goes wrong.

• Cons: You could lose your nest egg, take risks or cut corners to save money (such as not taking legal or financial advice) that might have a negative impact.

Business loans

Business loans are offered by banks and other lenders who specialise in offering fixed-term loans, typically of 12 months. You’ll need to submit to a credit check, and may be required to provide a business plan, depending on the size of your loan. 

• Pros: You’ll have a clear repayment schedule, a channel to support and advice if you get into difficulties. There are usually no charges other than the interest rate.

• Cons: You’d be committed to make regular monthly repayments over the loan term. Stiff penalties can be applied if you fall behind with payments.

Overdrafts

A business overdraft allow you to make payments and withdrawals after your current account balance drops below zero. Overdrafts offer a short-term cash flow solution rather than a long-term budgeting option.

• Pros: Overdrafts provide quick access funds if you don’t have your own money to draw on. They’re usually easy to arrange and you can often extend the size of your overdraft limit.

• Cons: As it’s easy to extend the withdrawal limit, you could rack up debt very quickly. Interest rates can be substantial. 

Credit cards

Business and personal credit cards work in much the same way. But business credit cards tend to come with some additional benefits attached. These can include higher credit limits because expenditure is linked so closely to the running of your enterprise. 

Unlike going on a spending spree for clothes or holidays, you’re more likely to keep outgoings in check, meaning the provider has a far greater chance of getting their money back, with interest.

Pros: A competitive interest rate and high credit limits. Sensible use can boost your credit score. You can earn bonus points and other rewards with a business credit card.

Cons: Interest charges can accumulate, leading to greater levels of debt if things get out of hand. 

Unofficial loans

Lending off friends and family is often an option because these people have an invested interest in your well-being and future. They want to see you succeed and be happy. 

• Pros: You can usually expect to pay much lower interest rates, if any is charged at all. Also, friends and family may be less rigid when it comes to repayment dates.

• Cons: if you fall behind in repayments, or simply can’t keep up with them at all, you risk irreparably damaging your relationship with someone you hold dear. If worse comes to the worse, you could end up in court against them, dragging others you both know into a messy dispute.

Short-term or payday loans

There are loans that are offered at short notice.

• Pros: Virtually none – if you think one, you do well to think again and perhaps take some advice from the likes of Citizens Advice or StepChange.

• Cons: Very high interest rates, potentially-aggressive pursuance of your debt.