An Essential Guide to Funding a Business

Self-funding your business can be a quick and simple way to source capital. Without external investors in your business, you should be able to retain complete control. However, you’ll also take on all the risk yourself [1].

Some business owners choose to tap into their savings or to sell property for an immediate cash influx. But be careful when funding a business this way. If your business proves unsuccessful, you could be left without savings or property to fall back on.

Creating a separate bank account can be useful when tracking your finances and ensuring you don’t use the wrong pot. Likewise, transferring a single lump sum can help you to avoid dipping into finances you intended on keeping separate from your business [2].

Setting spending limits, and sticking to them, can help with budgeting, too. Having a wider plan can also be beneficial when assessing risk and considering how much funding for a small business you’ll need [2].

Borrowing money from friends and family

Entrepreneurs often invest money from family and friends into their businesses. But while using money from people you know as small business funding may be quicker than traditional methods, it can also have complications.

You could damage your relationship with that person if things go awry and you’re unable to pay back the money. It’s often useful to agree on financial terms in advance, so both parties know what the money is for and how much is expected to be returned.

What is bootstrapping?

Bootstrapping when talking about funding a business refers to pulling yourself up by your own bootstraps. In other words, funding yourself by relying on the money you already have, and what you make from your business.

For many, a loan is the simplest way to fund a business. Applying for a business loan begins with completing an application form, often online. This should contain all the relevant information about your business and important details such as:

• How much you’re asking for
• Your business plans
• What you plan to do with your small business funding.

It’s important to check all the information you’ve provided is correct and up to date.

A bank will run a credit check before deciding to lend to you to see if you’ve borrowed money previously, and whether you paid it back on time. Try to stick to one application at a time. Applying for multiple loans at once can work against you and give the impression you’re struggling to find a loan.

Once the bank has reviewed your application and background and assessed your credit score, it’ll decide whether to offer you the loan. From there, you can decide whether to accept its terms or not.

Some entrepreneurs find that applying for a small business loan is the most sensible way of funding a business. But understanding the differences between loans and how they work can be difficult. Read our guide to small business loans for more information.

Using an overdraft to fund a business

Using an overdraft should not be a long-term funding solution. While they may offer easier access to money and potentially low interest rates (especially if you have a business account), overdrafts are intended to provide a small cash injection when funds are temporarily low.

They’re also payable on demand, meaning your bank could request you pay back the money when it says so [3].

How to get a government business loan

You may also be eligible for government funding for a business, with a range of grants and funds available to innovative companies. This support can take the form of a loan or tax relief, for example.

Each scheme has different requirements, so it’s useful for business owners to explore what's available (external link).

Alternatively, you may find you’re able to secure funding for a business from investors. While investors come in different forms and offer varying terms, securing their funding generally follows a similar journey.

It’s important to have an up-to-date business plan containing detailed information about your:

• company
• aims for the future
• professional history.

It’s possible to find investors through agencies, but you can also try to source them via professional and personal networking.

Seed funding

Designed to provide start-ups with capital in exchange for equity, seed funding can give new businesses the money needed to get the ball rolling.

Most start-ups will have to complete several fundraising rounds to get off the ground. These rounds are used to highlight your plans for your business and to ultimately encourage investors to put money in [4]. Seed funding is the first stage.

Learn more about seed funding

Angel investors

Often participants in a seed-funding round, angel investors will invest their own money for a small stake in the company. They often work in business themselves and may also offer advice, guidance and mentorship. You can expect an angel investor to spend time with you and provide a hands-on approach to their investment [5].

Venture capitalists

Venture capitalists, or VCs, are private equity investors who provide capital in exchange for equity. They are often used as a source of small business funding and can provide large cash injections [6].

Crowdfunding is when a business is funded by multiple individual investors. These ventures are typically found online on specific platforms such as Kickstarter and can be a great help for starting a business.

Investors will generally expect a return on their money, for example via a percentage of profits. Sometimes, gifts or products may be offered too, or even early access to a company’s product.

But crowdfunding, while relatively easy to set up, may struggle to provide enough money for your business in the long term.

To find out more about the concept and how it can work for you, why not explore our blog on crowdfunding?

If you’re looking for business start-up grants, there are multiple factors to consider. Most grants will have stipulations on who is eligible, so it can be wise to read all available information before applying.

Some businesses, such as those undertaking research or making advances in their field, may have a higher chance of success compared to others.

However, even if you are eligible, one downside is the high level of competition for funding. That said, the largest benefit of a grant is that it doesn’t need to be paid back.

Find out more about small business grants