RBS Business Banking | Finding funding for your business

Finding funding for your business

You have the big idea, but where do you find the cash to turn it into a business? Our guide can give you a quick steer to help you find the best sources of start-up funding.

Personal investment

Most start-ups involve some personal investment, especially as it can be difficult to attract further funding unless you’re prepared to put your own money into the business. You might want to use savings, an inheritance, a redundancy pay-off, or money from re-mortgaging your home. While borrowing on credit cards and unsecured personal loans are also options, these are more expensive and are not recommended as a solid foundation for a new start-up.

The advantage of putting up your own cash is the independence it gives you – lenders or investors may expect a say in how you run your business; they’ll certainly want a good return for their investment, and they can decide to withdraw their support at any time.

The downside is that if the business doesn’t work out, you could be left with nothing. If you’ve re-mortgaged, you may face large monthly repayments or be at risk of losing your home. You may end up paying interest on other loans for many years, while repayments on credit cards, if you use this option, can be very expensive.

Funding from family and friends

Asking those closest to you for financial help is often an option in the early days, especially if your start-up is too small to tempt investors or banks.
Gratifyingly, family and friends are often less demanding than banks and investors, offering interest-free or low-interest loans.
They could be willing to accept your back-of-an-envelope idea in lieu of a formal business plan.
They may also trust you to get on with the business without their input.
However, it’s important that you explain the risks to them, as well as your goals for the business. Ask them to contribute only as much as they can comfortably afford.
It’s best to put any agreement in writing to avoid potential fallouts later. You’ll need to be clear whether they are offering you a loan that will be paid back or an investment in return for a share of the business. You should ask a financial advisor or solicitor for advice, and then draw up an agreement.
This should cover issues such as interest and repayment terms, possible shareholder voting rights, and what happens should your investor want to exit the deal. A few principles agreed on a sheet of paper could save considerable heartache in the future.

Business angels and venture capitalists

If you’re looking for funding of more than £10,000 for your business, a business ”angel” may be the answer to your requirements. Business angels are wealthy individuals that invest capital in start-ups in return for shares in the business. In addition to cash, they can offer their valuable expertise.
Venture capitalists invest substantial sums in high-risk businesses or those that have the potential to generate substantial amounts of money in the longer term. They tend to expect a big say in how the business is run, and set targets that must be met before each stage of funding is released.
Either of these options will mean relinquishing a certain amount of control – and profits – in your company, but a venture capitalist may be an attractive option if you don’t expect to produce much cash at first. Unlike banks, which typically expect immediate payments on a loan or overdraft unless payment holidays are agreed upfront, outside investors don’t usually expect to see money back until the business can afford to pay it. It is important to make sure that you understand the terms of repayment upfront so that you can be confident and clear about what you’re aiming for.
Visit the British Business Angels Association

Government support

Interest-free loans, subsidised consultancy services and cash grants are all available from the Government under its Solutions for Business Portfolio on the Business Link website.

This range of schemes includes:

- Small Loans for Businesses of up to £50,000 if you have a viable business plan but have been refused bank finance
- Finance for Business Financial solutions, including loans and investment, if you have a viable business plan and have not been offered support by banks and investors

Enterprise Finance Guarantee Scheme

- If your business is eligible, the Government will back 75% of your loan from an approved lender, which means providing less security on your borrowing.

Grant for Business Investment

- A minimum £10,000 grant to support business investment or job creation projects.on.

Grants & other sources

Grants are a great way of funding a specific start-up cost, such as essential machinery, research or training. They are usually awarded for a specific project or purpose and as long as that’s what you use it for, you won’t need to pay the money back. It’s common practice to ask for business owners to match the grant sum.

Some charities, such as The Prince’s Trust, are well-known for giving grants to start-ups. However, the main funding bodies, apart from central Government, are either local authorities and councils, or local development agencies, such as the Local Enterprise Partnerships which replace the Regional Development Agencies.

If your business is in a sector that isn’t served by the usual lenders, or you’re setting up in a disadvantaged area, you might secure a loan for between £50 and £1million from a Community Development Financial Institution (CDFI). A CDFI loan can be used as capital, to buy equipment or premises, or fund a marketing campaign.

You may also be able to apply for a grant from Peer Group Lenders, such as the Ethnic Minority Enterprise Network. The Business Link Grants and Support Directory lists organisations that may be able to offer you grants, subsidies or advice.

Applying for a grant can be time-consuming and competition is fierce, but any money secured will be a valuable addition to your start-up fund.

Next steps

- Make sure your business plan takes into account all the money you will need to start and run your business for at least the first three years.
- Work out which finance options are best for your business.
- Use your business plan to prepare a presentation for potential investors and lenders, including cash flow and financial forecasts.
- Plan how and when investors will get their money back or how and when a loan will be repaid.

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