Your business idea seemed solid. You know what your product is and who you’re going to sell to. You’ve planned out the manufacturing, the marketing and even have a good idea of your financial trajectory, but there’s one slight problem – you don’t have the funds to cover set-up costs.
Many new businesses fail because they do not have enough cash to last them through the critical first few months of trading. If you’re in need of a cash injection to get your idea off the ground, there are a few options to try with varying degrees of risk. Make sure you research every option and understand the consequences if your business doesn’t meet your expectations. To help you see what options you have, here’s a list of ways to finance your project, starting with the riskiest option and becoming generally ‘safer’ as you go down the list.
1. Get a loan
Small business loans from banks typically have somewhere around 9% APR. There are also other government schemes such as grants and New Enterprise Allowance (NEA) for which you may be eligible. The government-backed Start Up Loan offers between £500-25,000 to start up your own business, with a relatively low 6% APR. Although it’s good to be aware of these options, it’s important to know whether you can repay the loan and interest on time. If you don’t, the bank or company is within their rights to seize your assets, potentially leading to bankruptcy.
2. Use a credit card temporarily
Another option for smaller start-ups is to finance initial cost on credit cards. This may be suitable if you are certain you can repay the amount within the first few months of operation, but may accrue high interest rates in the long term.
3. Find investors and shareholders
You may find that there are people willing to support your business venture financially. Informal loans from family or friends are a tantalising offer, but there are tax implications for everyone involved. If you are able to find an investor to cover the initial start-up cost, repayment can be flexible. Depending on the investor, they may forego interest on payments, delay payments until the company is returning a profit, or take shares in the profit. When discussing financial planning with any potential investors, make sure all terms are laid out clearly and a contract is signed. Our mentors can also talk you through venture capital, credit unions, and private investors such as Business angels.
If the demand for a product or service is already in place, crowdfunding can be a good source of income during the start-up phase. People who want to see your idea become a reality are likely to be your first customers and will engage in the creation process. Many crowdfunding platforms offer incentives for higher investment, so it is important to consider what promotional material you can afford to produce and give out.
Using your own savings is relatively risk-free in that you will not have to pay interest or report to investors; however, if the company makes a loss then you are the person who will feel it. Don’t invest any savings that you are unwilling to part with should the unexpected happen.
6. Competitions and awards
By far the least risky method of financing a start-up, applying to competitions, grants and award programmes can provide you with money and additional support whilst getting your venture off the ground. Although you cannot rely on winning enough money to finance the whole project, if your business is well thought-out, competitions and awards can provide the financial boost required to see your plan become a reality.
Propeller runs its own competition for ideas development and new business start-up called the Propeller Enterprise Award. The next round going live in the autumn. We also offer information on external funding opportunities and can support you through the application process. For more information, visit our website.
Picture: Sharmaine Shingirai Mundozo, University Entrepreneurs Grant Winner Educate North Awards 2018, supported by Propeller
If you want to discuss any of the above with an expert, the Propeller team can arrange a 1-to-1 meeting with a mentor. Just get in touch at firstname.lastname@example.org or come and see us on the 4th Floor of the Media Factory.