How to fund a startup in the UK

If you’re keen to give your new business the best possible chance of success, it is worth attempting to secure some form of financial support. To help you wrap your head around the different types of startup finance, we’ve compiled a handy beginner’s guide that discusses 4 options – small business loans, government startup finance, invoice financing, and crowdfunding.

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The best businesses are built from the ground up, and most entrepreneurs start with a very limited budget to fund their very first venture. But what is the bare minimum startup finance you’ll need to get your company off the ground and make ends meet?

According to researchers, the average UK start-up company spends £22,756 in its first year. That includes everything from accounting fees and legal costs to staffing overheads, utility fees, marketing, and production costs. However, it’s possible to kick-start a new company with less than that.

So, let’s get started!

1. Small business loans

The most common way to secure startup finance is to apply for a business loan. This is simply a type of borrowing instrument that is designed for commercial businesses rather than individual use.

Types of business loans

With most business loan providers, which are normally banks, you could borrow anywhere from £1,000 to £3m. This is ordinarily repayable over any period of time up to around 15 years. There are two types of business loans you should be aware of:

• Unsecured loans are borrowing instruments that enable your business to receive money without having to use your business assets as a security on the amount you borrow.
• Secured loans enable you to borrow money from a bank or investor using an asset that belongs to you as a security. If you fail to repay the loan as specified in your loan agreement, your lender then has the legal right to sell that asset to recoup their losses.

Most of the small business loans you’ll encounter on the high street are going to be unsecured, with repayments over one to five years.

There are more subcategories of loan types, and they vary in size and popularity. For example, invoice financing enables a lender to purchase your outstanding invoices for a fee, releasing money owed to you by customers. Some lenders will also extend cash advance loans, which is essentially just a payday loan for your company.

It’s worth noting that not all business loan lenders are regulated. That being said, lenders extending borrowing instruments to limited companies are regulated by the government, which means they’re legally obliged to meet certain requirements that protect your interests. Meanwhile, several institutions that lend only to sole traders could be unregulated.

No matter what type of loan you receive, it will generally come attached to one of two types of interest rate: a fixed rate or a variable rate. A fixed rate loan means that the amount of interest you pay back on top of the amount you borrow will not increase over time. Variable rates can go up and down unexpectedly – so you will generally want to avoid variable rate loans if you’re on the hunt for a long-term funding solution.

You can use any loan you secure for just about anything that relates directly to your business, from purchasing products and taking on staff, to paying off debts and buying new equipment.

The best place to start

If a business loan sounds like something you’d like to check out for your business, your best place is to start on the high street. Chances are, your current business banking provider already offers some form of incentivised business loan that could be suitable for your needs. HSBC, NatWest, Lloyds, Barclays and Santander all have their own borrowing products designed for small businesses.

For business loans of under £25,000, banks will normally allow you to apply directly online. If you’d like to borrow more than that, you’ll probably be required to phone in to discuss your funding needs or visit a branch.

If you’re worried about your personal credit history and how it may impact your loan application, it’s also worth going to your local bank and chatting with an expert. Most lenders will assess business loan applications on a case-by-case basis, and your own personal circumstances will often be weighed or discounted against a rock-solid business plan.

Just remember: before signing up for any sort of business loan, you should shop around. There’s always a better deal to be had somewhere else, so you should take your time and do your homework.

Unsecured business loans from Starling Bank

Starling Bank, one of the new digital banks operating in the UK, started offering unsecured business loans up to £250,000 in January 2020. According to Starling, their business loans are fair, flexible, competitively priced, and compare well with other providers.

Find out more about this offer of unsecured credit using this link: Starling Bank Business Loan.

2. Government business loans and startup finance

You might be able to secure a fantastic loan deal off the high street, but if you’d like to secure a fair loan that’s exceptionally low-risk, it’s worth checking out the UK Government’s special scheme.

Since its launch, the government’s Start Up Loans Company has extended over £400m worth of funding to some 50,000 businesses, and each one of those loans is backed by the government.

These loans are designed exclusively for businesses that have been trading for less than 24 months, which means you can’t apply for the scheme if you’ve got an old business that needs a cash injection. By applying for this startup finance scheme, you could borrow up to £25,000 with a fixed interest rate of 6%. That might not be the lowest interest rate deal on the market, but it’s certainly generous.

Loans are repayable between one and five years, and the government will never charge you a set-up fee or an early repayment charge if you want to settle your debt early.

Those great terms do come at a cost, though. Unlike a lot of bank loans, Start Up Loans have a few special requirements. For example, you’re not allowed to use a government business loan to repay any existing debts, or train for an industry qualification or investment opportunities that don’t already form a part of your existing business activities.

The Start Up Loans Company keeps a full list of criteria on its website if you’d like to see what else you can and cannot do with a loan.

How do you apply for a government business loan?

Once you’ve done your research, the government has made this startup finance scheme quick and easy to apply for – using this link.

Simply register your details online and you’ll be directed to the company’s application form. It includes a few questions about your personal situation, how much money you’d like to borrow, and what you plan on doing with it.

You’ll be given access to a personal business advisor if you’ve got any questions during the application process. You’ll then be asked to consent to a credit check to see whether you’re eligible and can afford a loan.

Next, you’ll need to finalise and submit all of the business documents that support your application. These will include your business plan, a cash flow forecast, and a personal survival budget. If you need help with your business plan, we’ve compiled an all-encompassing guide that should arm you with all the tools you’ll need to get started.

The Start Up Loans Company also offers a range of document templates – including a cash flow forecast generator – on their website.

Submitting your application

Once you’ve got all your documents ready to go, you can submit your application. The government will assess your loan to ensure that your business plan is strong and viable, and that your business will be able to afford the repayment scheme associated with the amount you’ve asked to borrow.

If your application is approved, you’ll then be sent a Loan Agreement in the post. Sign and return it to the Start Up Loans Company, and your funding will then be sent directly to you. You’ll also be invited to join the government’s business mentoring scheme.

The UK Government isn’t the only public organisation in the country that offers startup finance ad business funding schemes. A huge number of local authorities offer grants to start-ups in their various catchment areas that are city- or industry-specific. Many of these do not need to be paid back, as long as you fulfil the specified agreements.

You’ll also be able to find industry-specific grants and loan schemes on offer by local trade bodies. If you need a starting point for your search, the UK Government has compiled an excellent directory of UK-based business financing opportunities.

3. Invoice financing

Invoice financing is easier to secure than traditional loans; being sourced against the unpaid loans of your existing customers rather than your credit history and requiring no long-term commitments on your end in terms of loan repayments.

Aside from providing a business with quick funds they can access instantly; invoice financing also takes the stress of chasing money off the hands of the business.

There are 3 invoice financing options available to start ups:

Invoice discounting – Discounting allows businesses to raise funds against unpaid accounts receivable (the balance of money due to a company for its goods/services). With this option, the value of your sales ledger helps to determine the amount of money your startup can gain access to.

After securing finance, you must continue to ensure payments get made by customers and clients. For this reason, your clients will not know that you have worked with a discounting provider.

Invoice factoring – Operating similarly to discounting, factoring also helps firms raise money against their unpaid invoices. The difference is that after being provided with a sum of money, the lender then absorbs responsibility for collecting payments from your clients and customers.

Only after the lender manages to successfully collect payment will you be sent the remaining amount owed minus their fees for collection.

Selective invoice financing – Unlike factoring and discounting, this type of finance allows businesses to pick and choose the invoices that they would like to sell to a finance provider.

Selective invoice finance is a good choice if you don’t want to raise money against your full sales ledger. It provides businesses with more flexibility over which invoices get financed and when.

Invoice contracts

Traditional invoice providers will usually require a lengthy contract – factoring companies usually require you to sell your ledger for a longer period that can last up to 24 months.

Whilst these longer commitments can help more established companies access lower factoring rates, smaller firms should proceed with caution. You should also be aware of any additional fees listed – these may include credit checks, schedule processing, due diligence, and invoice processing.

Also be wary of contracts that mention the term, “recourse factoring”. These sorts of contracts require your business to refund the capital in the event that the lender is unable to get your customers to pay what they owe.

If you’re a small business or a freelancer without access to enough capital to take on these additional fees or potential refunds (if required), we recommend using alternative invoice finance providers, who won’t penalise you if your customers default on their payments.

They will also only charge you a one-off 2.5% fee to finance your invoices and don’t require you to agree to any long-term contracts, helping protect small businesses like yours from incurring any painful hidden costs.

4. Crowdfunding

Up until the last decade or so, securing a bank loan or a government grant would be your best bet for securing startup finance. But thanks to ever-evolving technologies, a huge number of companies are now relying on crowdfunding to get started trading.

If you’re new to the concept, crowdfunding is simply the act of persuading lots of individuals to donate very small amounts of money toward your cause. The idea is simple: if enough people like your business idea and are willing to donate £5 or £10 in order to help you launch that idea, you could easily end up making thousands of pounds in startup finance.

Crowdfunding has almost become a cultural phenomenon in its own right – with musicians, charities and artists all using increasingly popular web platforms to secure funds for their projects.

There are now more than 600 crowdfunding sites all across the globe, and chances are you’ve already heard of some of the more popular sites like Kickstarter, GoFundMe and Indiegogo.

How can I use crowdfunding for my business?

So, how can you leverage crowdfunding to power your new start-up? Simply sign up, write your pitch to users and promote your page. As always, different platforms do have different rules. For example, Kickstarter has a long list of all the types of projects or businesses it has banned from the site.

Unlike a business loan, you won’t normally be expected to pay any of that money back. Some platforms allow you to offer some small reward, such as a free product sample or thank you card, in exchange for a donation towards your business. But you keep everything you raise – it’s really that simple.

The only risk you’ll encounter is that some of these crowdfunding platforms require you to set a predefined funding target prior to the start of your campaign, and you’ll only be able to keep the funds you raise if you exceed that target.

The bottom line

It’s worth pointing out that this list of startup finance options is by no means exhaustive. There’s no right or wrong way to fund a new business venture. If you’re really keen to explore your opportunities, you could even check out the UK’s expansive network of venture capitalists and seed investors.

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But if you’re starting small and would like to minimise your borrowing risks, your safest bets are generally going to be borrowing money from a regulated lender or the government, or gaining funding through a crowdfunding campaign.

Just be sure to do plenty of research before agreeing to a borrowing arrangement. Always read the fine print, ask questions, and don’t be afraid to consult an accountant for professional advice. That way, you can be sure you’re giving your business the best possible start.