Starting a new business is an exciting and stimulating undertaking, often bringing with it a combination of unforeseen hurdles and personal victories. For many new business owners, getting access to capital finance is the first of these big hurdles to get across.
Whether you’ve had an idea on your mind for years and are finally putting it into practice, or you’re looking to generate additional funds to take your business to the next level, knowing what your options are will set the process in motion. The following five options are the best ways to fund your new venture.
How to Get Funding for a New Business
If, like so many others before you, your new business is operating on a shoestring budget, your best bet is to look at funding avenues like Peer to Peer lending, family loans, a bank overdraft, crowdfunding or exploring a small business grant if possible.
1) Peer to Peer Lending
Peer to Peer lending websites pair up borrowers and lenders, providing benefits for both parties. Investors can earn tax-free returns thanks to the IF-ISA arrangement*, whereas borrowers can benefit from quick, personal and accessible loans.
- Pros: As a borrower, you can access small business funding quicker and easier than with a traditional bank. On the investment side, ISA investors earn tax-free interest on up to £20,000 invested in all ISA types over a given year.*
- Cons: Peer to Peer loans do not necessarily come with lower interest rates than bank loans. On the investor side, P2P investments do not come with FSCS protection.
2) Family Loans
If you’re starting simple, a family loan is worth exploring; a family member may have fewer demands than a commercial entity. Draft a list of all your family members and close friends, including their parents, grandparents and anyone who may have the means to provide a loan to your business.
- Pros: You’ll be asking for help from someone who likely knows and trusts you already, which could also lead to being offered a lower interest rate.
- Cons: Mixing family and finance can get complicated, so make sure that all parties are on the same page, that you draw up sufficient documentation, and that the terms are clearly defined before you both sign.
3) Bank Overdraft
If you haven’t done so already, enquire with your business banker about an overdraft facility on your existing account or accounts. This will help to create a buffer for you to dip into should the need arise over time, or should you need a bit of extra cashflow to expand your operations from the offset.
- Pros: Overdrafts are relatively easy to arrange. The bank will only charge interest on the amount you overdraw. The credit rating of your business will not be affected by the overdraft.
- Cons: It can be expensive, as high rates of daily interest usually apply. Overdrafts are typically only available for small sums of money, so don’t bank on raising total capital from this route only.
Crowdfunding is a popular way to generate capital funding for a new business. Hosted through online platforms, it allows new business owners to open up a call for investments, typically from multiple investors in smaller sums. Crowdfunding doubles as word of mouth marketing, as well as providing insight into the popularity of your idea too.
- Pros: Crowdfunding allows you to create a personal relationship with your investors.
- Cons: As there are likely to be many when you use a platform like this, it also means you may have more people to answer to and more opinions to take into account with bigger decisions down the line.
5) Small Business Grants
Depending on where your business is registered, some governments offer occasional grants for new businesses. Remain realistic about your expectations with regards to small business grants; they typically provide smaller yearly amounts to facilitate healthy cashflow. Do some research to see what’s available and take note of any important application deadlines.
- Pros: You may benefit if your business has a direct link with initiatives that the council is keen to promote.
- Cons: The process will involve a lot of paperwork, so brace yourself for some red tape.
Now that you know what’s available, you can start exploring these options to generate capital or additional funding for your new business.
Remember to stay informed about new products entering the market, especially if you anticipate additional rounds of fundraising in the future.
*Capital is at risk. Kuflink is not protected by the Financial Services Compensation Scheme. Past returns should not be used as a guide to future performance. Investments secured against property do not guarantee repayment of capital and returns may be delayed. Tax rules apply to IF ISAs and may be subject to change