How to get funding for your startup
Launching a new business can be one of the most exciting but challenging experiences for aspiring entrepreneurs. While you might have a solid idea and vision, turning that concept into a viable, growing enterprises will often require financial support.
In this article, the UK’s favourite company formation agent, 1st Formations, will guide you through the best startup funding options.
Bootstrapping
Bootstrapping is a common business financing method. It means using your own funds to launch and grow your business. This might involve dipping into your savings, using a personal credit card, or reinvesting early-stage profits.
Bootstrapping can offer:
- Full ownership and control of your business
- No need to repay debts or share business profits
- Quicker decision-making without the need for external approval
However, you should note that the founder(s) are solely responsible for the financial risk involved, and your growth potential could be limited if funding runs out. This startup funding approach is best for entrepreneurs with low initial overheads, those with a large amount of savings, or those launching service-based businesses with minimal operating costs.
Support from family and friends
Informal investment from loved ones could be an easier funding option for early-stage businesses. It involves fewer legal processes than raising funds from external investors, and it comes with flexible terms, often at low or no interest.
You can also get quicker access to finance this way without strict approval.
That said, borrowing money from people you know personally can cause a strain on your relationship if the business fails. Also, there are often unclear arrangements when doing business with family, which can lead to disputes over repayment or equity.
To protect both sides, it’s crucial to document terms clearly. Consider using simple loan agreements or issuing shares where appropriate.
Start up loan
Start Up Loan is a UK government-backed funding scheme offering personal loans of up to £25,000 for early-stage businesses. There is a fixed interest rate of 6%, and repayment terms vary between 1 and 5 years. The scheme also includes free mentoring and business support.
To qualify for a Start Up Loan, you must:
- Be 18 or over
- Be a UK resident
- Have a UK business (or idea for a business) that has been trading for less than 36 months
This startup funding option is open to most types of small businesses, with no restrictions on industry or how you can use the funds. It also comes with friendly repayment terms, no application or early repayment fees, and no equity dilution, meaning you keep full ownership of your business.
This is an excellent choice if you have a solid business plan and need a moderate amount of capital to get started. However, be mindful that borrowers are personally liable, and credit checks apply. The loan amount is also capped, so it may not be suitable for all business models.
Angel investors
Angel investors provide financial backing to startups in exchange for equity. Many also offer strategic guidance, industry contacts, and business support.
You can find angels through local investment networks or national platforms like the UK Business Angels Association or Angel Investment Network.
The benefits of opting for angel investment include:
- Access to valuable mentoring as well as capital
- Potential for a long-term partnership with experienced investors
- Quick finance access thanks to faster funding rounds compared to venture capital
However, remember that angel investment means you’ll give away a portion of company ownership (and possibly control of your company). Angels also generally expect high growth and an eventual return on their investment, so you’ll need to deliver a solid business plan and a compelling pitch.
Venture capital
Venture capital (VC) firms invest in startups in exchange for equity, typically seeking companies with fast growth and innovation. VC funds usually offer larger investments than angel investors, but they can also be harder to secure and have higher demands in terms of business performance.
It’s worth considering VC funding as the significant investment and high-profile backers can accelerate scaling. They also offer invaluable access to investor networks and talent pools that can strengthen your business and help you achieve your commercial goals.
On the other hand, you should prepare for an intense due diligence process if you opt for VC funding for your startup. With new investors on board, it would also dilute equity, which could lead to a loss of control, potential conflicts over business direction, and pressure to deliver quick returns.
If your startup has the potential to disrupt an industry and grow quickly, VC funding may be suitable. Just be sure you’re prepared for the demands and accountability these investors expect.
Crowdfunding
Online crowdfunding platforms like Seedrs and Kickstarter allow you to raise funds from a pool of people, each contributing a small amount. There are several types of crowdfunding, including equity, reward, and donation-based.
Not only is crowdfunding a popular and effective way of raising startup funding, but it’s also excellent for building a community around your brand and spreading awareness. You can also test your business idea with real customers and access early-stage capital without going through banks or VCs.
A few things to consider before crowdfunding are:
- You’ll need to market your campaign and produce video assets for your page, which can be expensive and time-consuming
- Success heavily depends on public interest
- You’ll need to deliver on promises to all backers
Crowdfunding is particularly effective for consumer-facing businesses or product-based startups with a compelling story and visual assets.
Startup grants
Last but not least are startup grants. Various UK organisations, such as Innovate UK and local councils, offer business grants across tech, sustainability, and many other sectors.
Unlike traditional bank loans, you don’t need to repay grants, which makes it an attractive funding route. They also don’t involve giving away equity, so existing shareholdings aren’t diluted.
However, potential drawbacks are:
- Government grants are highly competitive, so there’s no guarantee that you’ll receive this startup funding
- They are often tied to specific projects, industries, and locations (unlike the Start Up Loan scheme)
- The application process and requirements can be highly administrative
If your startup operates in a high-priority sector like innovation or sustainability, visit the Gov.uk website to explore business grants.
In summary
There are numerous options to research when looking for startup funding. Whether you choose personal savings, supportive investors, crowdfunded campaigns, or government support, be sure to take your time and find a funding source that aligns with your strategy and vision.
If you’re ready to incorporate your startup and take the first step towards funding your business idea, look no further than the UK’s leading company formation agent, 1st Formations. Start by choosing your ideal company name and explore formation packages from just £52.99.