One of the biggest challenges an entrepreneur faces is coming up with the funds to get their idea off the ground.Copy HTMLCopy text
To make the process a little easier, here is the UK’s favourite company formation agent, 1st Formations, with five of the most popular ways to fund a new business idea. Read on to find out the positives and negatives of each option.
1. Personal savings
Many entrepreneurs choose to save up and use their own personal savings to fund their business in its early stages. This is one of the simplest ways to get started, as you won’t have to worry about paying anyone back or any debts accruing interest over time. It also shows potential investors that you have confidence in your idea and are willing to take personal financial risks to make it succeed.
However, if your business plan doesn’t work out, the personal loss will be significant, especially if you have other debts or a mortgage to pay. You may also have dependents who need the money in the future, like children going to university or elderly parents needing care.
So, if you choose this route, it’s important to have a clear budget to ensure you’re not putting yourself or those you care for under unnecessary financial strain.
2. Friends and family
Friends and family are also reliable sources of funding. Because they know you personally, they are often more willing to take a risk on your business idea compared to traditional lenders.
They may also offer you the money at 0% or a lower interest rate than you would find elsewhere, meaning the loan is less expensive to pay off over time. They may be more flexible, too, allowing you some leeway on your repayments when your cashflow is tight.
As for the negatives, borrowing money from friends and family can create potential for strained relationships if things go wrong. Additionally, they may not have the expertise to evaluate whether your business idea is a sound investment.
To avoid misunderstandings, treat this like a formal investment. Clearly outline the terms of the agreement, including repayment plans and equity stakes if applicable.
3. Business loans
Traditional business loans from banks or financial institutions are a common way to fund a new business. These loans can provide a significant amount of capital, more than you could save yourself over time, but need a strong credit history to be applicable.
They also require a solid business plan and proof of your ability to repay the loan. This is why acquiring a loan from a bank is known for being difficult, particularly for brand-new businesses that have not started trading yet. Banks prefer businesses already doing well, as they are more certain to generate enough revenue to repay the loan.
Before applying for a business loan, ensure your business plan is thorough and your financial projections are realistic.
4. Government grants and schemes
The UK government offers various grants and schemes to support new businesses, particularly those that are in specific industries such as tech, green energy, or community-focused projects.
When you receive a grant, there is no need to repay the money, making it worthwhile applying. That being said, they are limited to certain areas and sectors, so they can be highly competitive.
Bear in mind that though government funding can be substantial, it is usually not enough to cover your initial expenses completely. You will generally need to combine this funding with another source.
5. Bootstrapping
The expression “pick yourself up by your bootstraps” means improving your situation without help from others. In this context, bootstrapping means funding your business entirely through your own revenue.
To do this successfully, you will need to start trading while keeping costs low, then reinvest profits back into the business. Doing this means you have no loans to worry about repaying and you maintain full equity and control over your business. Many successful businesses, including tech giants like Mailchimp, started with bootstrapping.
This option also means your growth may be slower, and you will likely have to sacrifice taking a personal salary until your profits are high enough to make the business sustainable.
Ready to take the next step?
If none of these feel right, explore alternative options. There’s peer-to-peer lending, crowdfunding, angel investors, and venture capital firms, which involve trading your business’s equity for access to funding. There are also business incubators accelerators, and competitions which can provide valuable networking and mentorship opportunities.
Whichever option you choose, it’s important to create a solid business plan and be realistic about your finances to ensure your repayment plan is affordable.
It may be worth forming a limited company to gain limited liability protection. This means the company’s liability, finances, and assets are completely separate from the liability, finances, and assets of the people who own the business.
You can register a company in as little as 24 hours with 1st Formations. Our service is fast, trusted by more than one million UK companies, and affordable, with packages starting from as little as £52.99. Go to our website to find out more.
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