Crowdfunding
This involves raising capital from a large pool of people, including friends, family, and other networks. It’s also a great way to gauge public interest in your product, service, and business. Crowdfunding often takes place via online platforms set up for this purpose.
If your business involves goods, you may raise funds through rewards-based crowdfunding. This is where a business promises certain rewards (eg products or vouchers) in return for a specific level of investment. For example, you could raise capital by pre-selling your product to those who are interested in it.
Alternatively, you may raise funds through equity crowdfunding. This involves giving investors shares in return for their investment. Since investors in this instance are likely to be a multitude of individuals, equity crowdfunding may allow startups to avoid giving over a significant amount of control over their business, as they may find themselves doing if they receive comparable investment from a single venture capital firm.Equity crowdfunding is beneficial in that, since the return for their investment is dependent on your business’ success, investors will be motivated to see through your startups’ success (as opposed to eg rewards-based crowdfunding, where investors won’t necessarily have any interest in your business once they receive their reward).
Business loans
A loan is a type of debt financing, whereby the business takes on debt with their investor (ie forms a legally binding agreement to pay back the amount borrowed, usually with interest). There is generally no transfer of equity. Generally, large banks would be reluctant to issue loans to new businesses. However, private lenders, such as Funding Circle, are often willing to assist new companies. As with bank loans, you’ll have to repay the sum borrowed with interest.
Angel investors
Angel investors are high net worth individuals that seek to invest in new businesses at an early stage in return for equity (ie shares in the business). They’re usually accustomed to making risky investments in this capacity (often they will also have a portfolio of more stable investments too). It’s not uncommon for an angel investor to invest based on their support of an individual entrepreneur behind a startup, rather than based purely on the prospects of the business itself. Angel investors tend to already have (or have invested in) successful businesses, and they’re usually well-versed in the industries they’re investing in. They can also bring in resources (eg expertise) as they tend to be well-connected.
Angel investors usually join together to form angel investor networks. Pitching your business to a network is beneficial as it introduces the business to multiple investors at once. Even if the network as a whole decides not to invest in your business, you may attract a specific investor.
Venture capital firms
Venture capital firms invest in new businesses with strong long-term growth potential in exchange for a stake in the business (ie equity). Venture capital firms are usually established professional institutions with multiple employees who carry out their investment activities - as opposed to individual angel investors. Venture capitalists will often be asked to be on a company’s board of directors. Their goal is to make high-risk investments for very high returns by way of an eventual acquisition (ie by being paid well if the business is eventually bought by another, larger business or entity) or via an Initial Public Offering (IPO) (ie when the business is floated on a stock market and the public can buy shares for, hopefully, high prices).
It can be challenging to persuade these firms to invest in your business unless you can show that your product is a product-market fit (ie customers are buying your product at a high enough rate to sustain your business’ growth and profitability). Therefore, it may be wise to raise capital via other means to establish your business somewhat within your market before applying for venture capital funding (eg by seeking funding from angel investors or crowdfunding).
Venture capital firms are able to introduce you to their network and other opportunities, for example partnerships. They can also offer guidance in crucial areas including recruitment, marketing, financial management, technology, and legal matters. This is sometimes a core part of the support that they offer to your business.
Government schemes and loans
There are a series of Government run or backed initiatives that help to fund new businesses. Some key initiatives are:
The SEIS and EIS are Government-backed initiatives that incentivise investors to invest in new businesses by offering them tax benefits (eg tax reliefs). The SEIS is suitable for companies at an early stage while the EIS is appropriate for established companies. For more information, read Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
The Start Up Loan is a Government-backed personal (rather than business) loan available to new businesses. If you apply for a Start Up Loan and are successful, you’ll also receive help writing your business plan and free mentoring for up to 12 months.
For more information on the Government's efforts to help fund businesses, use the Business finance and support finder.
Small business grants
Grants are a type of funding which generally does not have to be paid back. Various grants are available to startups, for example the Innovate UK Smart Grant, a Government-backed grant for innovative ideas.
You can use the business finance and support finder (select ‘grants’) to find more grant options available for your business.
Business incubators
Incubators are programmes that assist you in business development. This can include helping you to secure early-stage investments, providing office space or co-working space, and offering mentorship. Before applying to a particular programme, you should make sure that it caters to the industry you’re seeking to enter.
These programmes can also help grow your network as you'll be surrounded by other ambitious entrepreneurs that are growing their businesses.