Essential guide to financing your start-up business

Financing a startup can be a complex and challenging process, but with the right strategy and approach, it can also be a rewarding experience that sets the foundation for a successful business. One important step in financing your startup is to determine how much funding you need and what type of financing options are available to you.

This may include traditional loans, venture capital funding, crowdfunding, or other sources of capital. It’s also important to have a solid business plan that outlines your vision, goals, and strategy for growth, as this will help investors or lenders understand your business and make informed decisions about funding.

Additionally, networking and building relationships with potential investors or partners can be a valuable part of the financing process. By taking a strategic and well-informed approach to financing, you can give your startup the best chance for success

Your new business venture is likely going to need some financial backing. So, where can you get that from? Getting funding always starts with knowing what options are available to you, from business loans to investment opportunities.

With this guide, we help you understand what funding options you have at different stages of your business’ development, making the process easier.

Step 1: Prepare your start-up financials

Investing opportunities should be investigated thoroughly. You will be able to obtain funding much more easily if you know exactly where you stand financially. Determine what type of funding you will need to achieve the opportunity. What is the required amount of financial information?

How far along you are in the journey determines how long it will take. Does your business have a history of trading for six months, a year, or longer? As soon as you start trading, you will need to produce financial statements and reports that demonstrate the potential of your business.

You will have to demonstrate the following:

• Net profit
• Sales
• Margins
• Cash flow
• Customer acquisition cost
• Debt
• Accounts receivable turnover
• Break-even point
• Personal investment

A business in full swing should easily have access to these numbers. You’ll need to research these figures if you’re just starting out, or you can use industry benchmarks and forecasts to estimate them.

Step 2: Decide how much financing you need and why

Your investment goal should be clear, as well as where you intend to invest the funds. To gain investors’ trust, you need to convince them that your business is well-positioned to grow, and that your investments will pay off.

To demonstrate the outcome of your investments, you must explain how you will allocate funds, as well as why you are looking for investments.

There are a number of possible reasons for this, including:

• Entering new markets
• Growing your user base
• Manufacturing your product
• Expanding your team
• Moving into a new office or warehouse

Regardless of where the funds come from, show how they will help your company reach its next level of growth, and then map that to the overall market potential.

Step 3: Choose the right financing option

Financing a start-up has a variety of options – the tricky part is understanding them all.

The hard work has been done for you. You must consider your business’s model, maturity, and risk tolerance when deciding which of the options below will work for you.

Bank loans

Most businesses obtain funding from traditional bank loans. In addition, banks typically avoid investing in start-ups with less than a couple of years’ trading history because they are risk averse. There are a number of alternative lenders that offer start up loans in the UK.

Pros

• Interest rates tend to be lower with them
• The business does not require you to give up any equity

Cons

• It can be a tedious process
• Banks can be risk-averse
• There is also a tendency for banks to prefer certain business types over others (i.e. limited companies over sole traders).

Venture capital

You receive equity from VCs in exchange for their investment in your company. The percentage of equity they hold depends on the valuation of the business and how much they invest.

Pros

• Funding can be unlocked in large amounts
• Expertise at your fingertips
• Relationships and networks established in business
• Growth can be dramatically accelerated

Cons

• Your business must give up equity
• Business owners may be involved in the day-to-day operations of their funders

Revenue-based Financing

Business owners with predictable revenue can leverage revenue-based financing to fund growth through reliable acquisition channels like online ads. A percentage of your future revenues is paid back instead of interest or equity.

Pros of Revenue-based Financing

• No interest
• If your sales suddenly slow your payments will too
• Keep all your equity
• You can receive funding in less than 24 hours

Cons of Revenue-based Financing

• Recurring revenue-generating businesses only
• There is usually no more than $5 million invested

Who it’s best for: Businesses such as ecommerce and SaaS can fund ads without giving up part of their revenue because of this type of flexible funding.

Incubators and Accelerators

Businesses benefit from programs such as incubators and accelerators, which aim to boost their growth initially. In exchange for equity in the company, they provide seed investment and mentoring to ambitious start-ups.

Pros

• Programs for business development are included in many
• Expertise and networks are available
• Our startup teams are nurtured and supported as they grow into their roles

Cons

• There can be a lot of stress involved in selection processes
• Time commitments/schedules may be required

Government Grants

Grants are available from the government to help new businesses succeed. There are different criteria for each grant, and you may have to match the amount they invest.

Pros

• No repayments are needed
• No loss of equity
• Widely available

Cons

• The selection process is reserved for small businesses
• Short-term solution

Friends and family

Family and friends are often willing to support you in your new venture, often as customers, but sometimes as investors as well.

The flexibility it may provide you may be worth considering, but its impact on your relationships must be considered as well. Put formal agreements in writing, and be honest and open.

Pros

• You’ll get cash fast
• Terms will be flexible
• No loss of equity
• Comes from people you know and rely on

Cons

• There could be a limit on investment amounts
• The relationship between two people may suffer
• There may be a lack of experience among investors

Business Credit Cards

Credit cards are a flexible way to finance business growth since they can be used for day-to-day expenses and by multiple members of your team.

In addition to rewards and benefits, credit cards also offer air miles, cashback, and 0% interest on purchases. However, you won’t be able to build your business with this financing option – it can help you make it until the end of the month, but not much beyond that.

Pros

• No loss of equity
• Multiple members of staff can have access
• Flexibility on spending

Cons

• Interest and annual fees
• Expensive form of borrowing
• Smaller loan amounts

Crowdfunding

Investing in your business through crowdfunding involves pitching your business online and offering incentives, perks, and rewards. Often, new or existing companies use this form of funding to fund future growth.

Pros

• Equity is not lost or repaid
• It is a great way to get financing for business ideas that may not be appealing to conventional investors
• Your business idea can be tested to see how the public reacts

Cons

• Funding is not guaranteed
• In the absence of a following, raising capital may take some time
• Round preparation and closing take a lot of time

Step 4: Prepare your application and documents

It’s time to prepare your pitch once you’ve decided which type of investment is right for you.

Your Business Plan

Before considering whether to fund you, investors and lenders will want to see your business plan.

In your business plan, you describe what the investment will do for you over the next 18 months, usually in terms of reaching goals and milestones. As a result, building a business plan requires serious thought and if you have no experience, see if an online coach can help.

The executive summary in your plan should show how your product stacks up against the competition and demonstrate how you have a firm understanding of your target market’s intent to buy.

The following information should be included in your pitch deck:

• Vision and value proposition
• The problem you are solving
• Target market and opportunity
• Business model
• Traction and validation
• Marketing and sales strategy
• Your team
• Financials
• Competitive analysis
• Investment required and planned use of funds

Don’t limit yourself to sending them to someone you know. What level of confidence does the person reading these documents have to share them more widely?

Should you fund your start up?

Many businesses need support to invest in their growth, even though some can bootstrap without external funding.

According to the below points, you should probably seek funding if these are true

• There is a clear plan for how you will use the capital and how you will grow your business with it
• You need capital to launch into new markets, take on competition, or develop new products for your business.
• How and when you will repay the borrowed capital are already known to you
• As you seek funding, you can step away from the day-to-day management of your business

Later-stage financing options

To achieve second-stage growth, you may need to find additional funding after your initial investment.

After you’ve passed the start-up phase, you have several options for financing your business:

Debt funding

A debt financing method involves borrowing money to raise capital. A later date will be agreed upon to pay back this capital, and interest will be added to it.

Pros

• Repayments are usually tax-deductible
• No loss of equity

Cons

• Repayments are required regardless of revenue
• Interest to be paid to lenders
• May need to put up collateral

Follow-on capital

An investor who has already invested in your business will provide you with follow-on capital.

Pros

• Efficient deployment of capital
• May include more than the initial investment

Cons

• May lose board seats to investors
• You need to convince investors all over again

Venture capital

In later-stage investments, venture capitalists seek to provide capital to companies that are in growth mode.

A venture capitalist invests in your business in exchange for equity, just like with venture capital. Depending on how much they invest and what the business is valued at, they take varying amounts of equity in the business.

Pros

• Access to expertise
• Established business relationships and networks
• Can accelerate growth dramatically

Cons

• You have to give up equity in your business
• Funders may be involved in the day-to-day running of your business

Angel investors

A wealthy investor provides funding for your business in exchange for equity. Venture capitalists typically offer a higher investment amount in exchange for more equity, which is the key difference between angel investors and VCs.

Pros

• No repayment is required
• No cost involved
• Angels are more willing to take risks

Cons

• Loss of equity
• Loss of control of business

What’s the best way to finance your start up?

Understanding how each financing option will impact your business is the first step to taking advantage of them. To determine how to fund your business, you must research what your business needs to grow, as well as the different financing options available.

As a founder, your ‘North Star’ should be a clear business goal that informs all other decisions. There are often a few ways to approach the problem, even while it is helpful to understand how others have funded their growth.

Frequently asked questions

What is the best way to finance a startup?

The best way to finance a startup depends on several factors, including the amount of funding needed, the stage of the business, and the goals of the founders. Some common financing options include traditional loans from banks or credit unions, venture capital funding, crowdfunding, angel investors, and bootstrapping. It's important to research and carefully consider each option to determine which one is the best fit for your startup

How can I increase my chances of obtaining financing for my startup?

To increase your chances of obtaining financing for your startup, it's important to have a clear and compelling business plan that outlines your vision, goals, and strategy for growth. You should also have a solid understanding of your target market, competition, and financial projections. Networking and building relationships with potential investors or lenders can also be helpful, as can having a strong team with diverse skills and experience.

What are some potential drawbacks of financing a startup?

There are several potential drawbacks to financing a startup, including the risk of losing control of the business if you accept outside investment, the potential for high interest rates or fees with some financing options, and the pressure to meet financial targets or milestones. Additionally, some founders may struggle with the idea of taking on debt or giving up equity in their business. It's important to carefully weigh the pros and cons of each financing option and determine which one is best suited to your specific needs and goals.

Conclusion

There are several options available to finance a startup, each with its own advantages and disadvantages. One common option is to seek funding from traditional lenders, such as banks or credit unions, which typically offer lower interest rates and longer repayment terms than other financing sources. Another option is to seek venture capital funding, which involves obtaining investments from high-net-worth individuals or venture capital firms in exchange for an ownership stake in the company.

Crowdfunding is another popular option, where a large number of individuals contribute small amounts of money to support the startup in exchange for a reward or equity stake. Other options include angel investors, government grants or loans, and bootstrapping, which involves using personal savings or revenue generated from the business to fund its growth.

Each financing option has its own unique benefits and drawbacks, and it’s important for startups to carefully consider which option is best suited to their specific needs and goals.