Quick links

Where to go for Funding

NIC Document

Summary

This guide introduces the many types of finance available to new businesses and the ones that may be applicable to you.

In brief

  1. Before seeking funding
  2. Business growth stages
  3. Funding sources

Introduction

Finance sources for business start-ups are varied. Choosing the one that is right for you will depend on your business structure, market sector, growth stage (maturity) and on how much you want to share business control and profits. Funding requirements also vary with the type of product. Some product developments can be wholly financed by the owner, while others require large capital investment, such as for plant and equipment.

Before seeking funding

  • Before seeking funding, you should identify:
  • How much funding is required and over what period?
  • What risks are involved in the investment?
  • What will the funding be spent on?
  • What type of business are you involved in?
  • What markets are you aiming for?
  • How much is the existing business worth?
  • How much of the business are you prepared to share?
  • Do you have a good record of performance in business?
  • What timescales are you bound by? Any route to funding requires a strong business plan

Business growth stages

Start-up

Start-up funding generally comes from entrepreneurs, family and friends. At this stage, very few businesses use bank loans or other sources of funding. Technology start-ups have access to a range of grants for feasibility, proof of concept and research and development activities. These grants support between 30-100% of the specific project costs, but support levels of 50% are the most common. Personal savings, often from remortgaging a personal property, initially fund over half of British start-ups. Finance raised from friends and family needs careful consideration too. Even with family help, you must draw up a legal agreement. Depending on your existing job role, organisations such as universities and NHS Trusts may have support mechanisms and potential funding sources to help finance your start-up. They will also be looking for a return on their investment. To find out more about this route, you should contact the University Technology Transfer Office or your regional NHS Innovation Hub.

Early stage

Once your business starts trading, you may need additional funding by investors such as business angels. Business angels are individuals or groups of individuals who invest their own capital (usually up to £100,000 for each angel) in a business in order to gain a good return on their investment. Because they tend to invest in businesses they understand and have had prior management experience in, they can offer value beyond just the cash. This means it is essential to identify the right business angel for your type of business (see the guide ‘Private Finance: Business Angels and Venture Capital’). Use investor communities such as the British Business Angels Association and British Private Equity and Venture Capital Association (see below for websites) or talk to people you know who have already received investment. A number of organisations also hold partnering meetings to bring inventors (companies) to the investment community. Contact Business Link or your local Chamber of Commerce to find out more.

Growth

Once your business has started growing, has a strong management team in place and established a revenue stream, you can look for early-stage venture capital funding. This type of funding is long-term committed share capital invested in a business in exchange for a stake in the business. The venture capitalist may well want a seat on the board of directors of the company to be able to influence its strategic direction. They will also want to exit from the business in three to seven years, usually through listing on the Stock Exchange, a trade sale or a refinancing initiative.

Maturity

The mature company will look to the AIM or FTSE markets as a way of financing further growth until it gets to the stage when it looks for mergers and acquisitions, management buy-outs (MBOs), etc. This will potentially move the company from a private limited company to a public limited company.

Funding sources

Debt financing

Before embarking on any debt financing, you should compare the costs, charges, interest rates and terms and consider the tax implications of the options. Sources of debt finance include overdrafts, credit cards, loans, mortgages, hire purchase agreements and leasing agreements.

Bank borrowing

Most lenders will require some form of security, such as your home, business premises, investments, savings, etc. You can use a third party debt guarantee, in which the third party underwrites your debt and, in the case of default, the lender will recover the outstanding debt and any charges from the third party. For a technology business, some banks will accept heads of agreement for licence agreements or similar commercial deals as collateral for loans. You can insure against the risks involved, including default as a result of illness or injury, though not for poor business performance.

Small Firms Loan Guarantee Scheme

In order to borrow from a lender such as a bank, a small business requiring growth capital will need some form of security, in the form of assets. In some cases, this security will not be available or the company will not have been trading long enough to prove its sales revenues. The Small Firms Loan Guarantee Scheme provides unsecured loans of up to £250,000 for up to 10 years for companies with a trading record of less than five years. Companies with more than 200 employees or an annual turnover of more than £5.6 million are not eligible.

Equity financing

Angel networks are individuals that group together to pool their investment and increase the efficiency of matching their needs with local entrepreneurs. In these cases, the investment can rise to £1 million or even higher. For further details, see the guide: ‘Private Finance: Business Angels and Venture Capital’. Venture capitalists provide committed share capital to assist unquoted companies to expand and will consider businesses at all stages of growth. They usually look to invest a minimum of £2 million, with an exit strategy in three to seven years via a trade sale, refinancing or market flotation.

Grants

Many grant schemes are provided by national, regional and local government to support economic development and regeneration. Your eligibility for these schemes may be affected by your business sector, location, business size, and maturity. There is a wide range of opportunities for businesses involved in research and development, especially those wishing to collaborate with other companies or universities.

Further information

  1. Gov.UK Business Support
  2. www.is4profit.com
  3. www.j4b.co.uk
  4. www.clearlybusiness.com
  5. Private finance British Business Angels Association - www.bbaa.org.uk
  6. British Private Equity and Venture Capital Association - www.bvca.co.uk
  7. European Private Equity and Venture Capital Association - www.evca.eu