When it comes to getting capital for your business idea, there is no other option that is more convenient than using your savings. With your savings, you don’t need to worry about repaying lenders, and there’s no need to stress about paying high-interest rates. Unfortunately, very few entrepreneurs find themselves in a position where they can save enough to raise capital for their business ideas. Even if you don’t have enough personal savings to fund your business, there are several other options you may want to explore, depending on the type of business idea you have. You need to be sure of your readiness to make your business successful before seeking any of these loans;
The Government Start Up Loan Scheme
Perhaps one of the easiest options for startup finance is a government loan scheme. These loans were first launched by the UK government in 2012 to encourage entrepreneurs to fund their business ideas successfully. The grant may vary from £500 and £25,000 with a fixed annual interest rate of 6%. This loan can be repaid within 1-5 years.
This is one of the lowest interest-rate loans for businesses but you have to submit your cash-flow forecast and business plan to the lenders to prove that your business can afford the monthly loan repayment. If you are accepted for this type of start up finance, you will be paired with a mentor for at least 12 months for guidance and monitoring.
The Angel Investors
Many startup entrepreneurs are now looking for angel investors to fund their business ideas. Angel investors are simply wealthy investors looking for sustainable business ideas to invest in their early stages. You can approach an angel investor in person but it is always easier and better to pitch with a potential investor through an angel investment network that specializes in different areas, in the UK.
A face to face meeting is very important in securing an Angel investor for your business, and in most cases, Angel investors may want to have a stake in your business running, including a large share of the business profit.
Crowdfunding has become one of the most popular ways of getting funding for a business idea in recent years and the interest rates on these loans are much lower than those charged by traditional banks. Crowd-funders are a group of lenders who pull resources together to lend money to individual startup entrepreneurs. Crowdfunding will not only allow you to raise funding for your business, but it will also help you achieve more publicity.
Crowdfunding normally comes in two ways;
- Consumer-focused crowdfunding and,
- Investor-focused crowdfunding.
The consumer-focused crowdfunding is a type of capital funding you can obtain if your business is product and services oriented. When the reward for the investors is the products themselves, then you don’t have to give up shares of your company if you seek consumer-focused crowdfunding.
The investor-focused crowdfunding will allow you to raise start-up financing by turning your lenders into shareholders. This option of crowdfunding financing is ideal for businesses that are not product-related and it is also suitable for smaller businesses looking for funds to expand. If you don’t mind your investors having equity in your business, crowdfunding is one of the ideal funding options you should consider for your business.
Family and Friends
Funding for a business startup from family and friends perhaps is next to personal savings when it comes to interest-free loans. Though some wealthy friends and family may ask for some interest on the loans, it is generally lower than interest rates from government grants and traditional banks.
Though the generosity of friends and family can help in kick-starting your business, you should, however, be cautious of the risks involved in taking loans from loved ones. Money-related issues between you and your friends or family and destroy the cordial relationship you had with them previously. Your friends are your biggest business promoters aside from being a potential source of funding for the business. Never borrow business funds from those who can’t afford to lose much money and those who don’t appreciate the risks involved.
The Peer-to-Peer Business loans
Peer-to-peer business loans look similar to the crowdfunding loan options in many ways, but in this case, lenders don’t automatically get a stake in your business.
When it comes to giving out loans to entrepreneurs, large banks are typically risk-conscious, thus they hardly give out loans to businesses that have hardly proven themselves. Peer-to-peer lenders aim at giving loans to young companies, looking to start or expand their existing operations. Peer-to-peer lenders are an army of investors in the UK that provide unsecured business loans of up to £500,000. The terms of loan repayment are usually longer while interest rates are fixed when it comes to peer-to-peer business startup loans.
There are several other start-up finance loans you may want to consider in addition to the major ones highlighted above. The small business grant, for instance, is one alternative option you may consider to raise capital for your business. The small business grant is available mostly to innovative startups in different fields and most especially in IT, technology, engineering, sciences, and Agriculture. If you are looking at starting a business with a ground-breaking invention, this will be one of your best options for securing finance.
Venture capital is another start-up finance option you may want to consider. Investors in venture capital can be selective because they want to fund businesses with high growth potentials. If you are experimenting with a business idea, you will probably not qualify for Venture capital financing. You may want to check the British Venture Capital Association for a Directory of active venture capitalists available in different fields.
Most of the startup finance options mentioned above offer only unsecured loans, while traditional banks offer secured loans, which means you have to apply for a startup loan with collateral that has a value higher than that of the loan. Having collateral to secure a loan at a bank will boost your chances but it is not a guarantee that you will obtain the loan as you will need to submit other relevant financial information.