How to start your own business, part 5: Where to get finance, from crowdfunding to equity backers

An 11-part series on how to start your own business. Part five: all the options for funding your start-up (there are more sources of finance than just the bank)

In this article

• Bank finance

• Peer-to-peer lenders and crowdfunding

• Equity finance

• Grants and government loans

Depending on the type of enterprise you are setting up, you may need some money to get it off the ground. This can come from your own savings or a redundancy payout, for example, but there are several alternative sources of money if you need investment or some cash to help you cover day-to-day expenses.

Bank finance

If you set up a business bank account, your bank will probably ask if you have any loan requirements. Bear in mind that your account is likely to come with an overdraft facility, with a limit set in advance.

Expect your overdraft limit to be reviewed once or twice a year – if it is cut, you may have to repay what you owe with little notice. The interest charges on overdrafts can be high, although they can be a more flexible option than business loans.

Business credit cards are another flexible option, but again interest charges can be high. If you do opt for a loan, it could be tied to the asset you are buying, such as a piece of machinery or a van. Putting up your own home as security could be a very risky move, however.

Decide whether you want a fixed interest rate or one that is linked to the Bank of England base rate. Banks have become much more reluctant to lend to small firms since the financial crisis: if you need finance, you should ensure your business plan is as clear and realistic as possible. Expect your application to come under intense scrutiny.

Peer-to-peer lenders and crowdfunding

A number of peer-to-peer (P2P) lending platforms have sprung up in recent years: these allow people with cash to save or invest to lend it to other individuals and businesses.

In theory, the lenders should get better returns than from savings accounts, while the borrowers have access to cheaper funds.

Zopa.com offers loans to sole traders, while FundingCircle.com provides finance to all types of business.

The creditworthiness of you and/or your business will be checked before you can borrow from P2P services, and it may be that your firm has to be up and running before you can access finance this way.

Equity finance

Investors such as venture capitalists, private equity firms and business angels may be willing to put money into your firm in return for a stake in its ownership.

If you have a business idea that is potentially very lucrative but needs money to get off the ground, this could be the right option for you – but it does mean ceding control of your enterprise to some extent.

To obtain this kind of funding, you will need a very clear and compelling business plan.

One further advantage of this kind of finance is that your investor may be able to offer you guidance and act as a mentor. The British Private Equity & Venture Capital Association is a good place to start.

Grants and government loans

Depending on what your business does, your personal background and where you are in the country, you could be eligible for a government grant or a loan with relatively favourable terms.

There are a host of programmes that could help your firm get off the ground: to search according to region, business type and the stage you are at in your development, visit the government-backed business finance support finder.

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