The best businesses are built from the ground up. Most entrepreneurs haven’t got a whole lot of money to fund their very first business venture – they scrape together whatever they possibly can and hit the ground running. But what is the bare minimum you will need in order to start trading 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 – and it’s perfectly possible to kick-start a company on less than that.
But if you’re keen to give your new business its best possible chance of success, it is definitely worth attempting to secure some form of financial support. To help you wrap your head around all different types of business financing and learn how to apply, we’ve compiled a handy how-to guide that covers all of the basics on business loans, grants and crowdfunding.
What are small business loans?
The most common way to secure funding for your new venture is to apply for a business loan.
In case you’re new to the concept, a business loan is simply a type of borrowing instrument that is designed for commercial businesses rather than individual use. With most business loan providers, which are normally banks, you could borrow anywhere from £1,000 to £3m. This is ordinarily repayable for any period of time up to around 15 years, and 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, and will be payable over one to five years.
There are also way 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.
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 always shop around. There’s always a better deal to be had somewhere else, and so you should take your time and do your homework.
Does the government offer business loans?
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 £350m worth of funding to some 50,000 businesses, and each one of those loans are backed by the government.
These loans are designed exclusively for businesses that have been trading 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 the 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, 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 scheme quick and easy to apply for.
Simply register your details online, and then 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, and then you’ll 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.
Once you’ve gotten all your documents ready to go, you can submit your application. The government will then assess your loan to ensure 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 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.
What is crowdfunding and how could I use it for my business?
Up until the last decade or so, securing a bank loan or a government grant would be your best bet in order to secure funding for your new business. 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 towards 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.
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.
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 is by no means exhaustive. There’s no right or wrong way to fund a new business venture. If you’re really keen on exploring your opportunities, you could even check out the UK’s expansive network of venture capitalists and seed investors.
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 either a bank or other regulated lender, the government or gaining funding through a crowdfunding campaign.
As always, 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.