6 Popular Funding Options for Entrepreneurs in the UK

Lack of funding is one of the most common reasons why early-stage businesses fail. Even a winning product and strong leadership team are no guarantee of success in today’s economic climate.

For any entrepreneur seeking to establish, grow, and scale their business, accessing sufficient funding to get their venture off the ground is crucial. Without a proven track record in business, however, accessing venture finance for a new startup can be challenging, to say the least. The odds are often stacked against the founder in terms of traditional funding routes, such as a bank loan.

Fortunately, in the UK today, other avenues have opened for early-stage businesses to access the financing they so badly need. From crowdfunding to business angels, we look at six popular funding routes for UK entrepreneurs, enabling them to turn innovative ideas into profitable businesses.

1. Bank Loans

Traditional bank loans remain a popular source of funding for many startups. Used properly, they can be a simple and effective way of financing the growth of the business. However, it is important for founders to carefully research the terms of the loan and the interest rate it attracts. Businesses that are yet to open a business bank account should check their likelihood of being approved for a loan before applying, since being declined could be detrimental to their credit score, making it even harder to access financing.

2. Business Overdrafts

A business overdraft can be an effective means of accessing financing in a hurry, enabling the enterprise to continue making payments once its balance hits zero, up to a limit set by the bank. An overdraft facility is a useful option for businesses with fluctuating income, for example a venture whose operations involve seasonal activities, providing a financial cushion when the business experiences a short-term cash flow problem.

The downside to business overdrafts lies in the fact that this type of financing typically attracts a high interest rate, with some banks charging an overdraft fee in addition to interest. Banks also reserve the right to demand repayment of the overdraft in full at any time, making it a somewhat risky finance option.

3. Friends and Family

A common funding method for early-stage businesses is asking friends and family for financial support. This option is most appropriate for ventures that need a short-term injection of cash to prove that their concept could be successful, enabling them to persuade other investors to jump onboard. Investment from friends and family is typically fast and flexible, and could potentially be a great investment for them, too. Nevertheless, mixing business and pleasure is always risky, creating scope for a souring of relations if something goes wrong.

4. Crowdfunding

Today, crowdfunding is an important financing route for many small businesses in the UK. The concept is simple. As the name implies, many people (i.e., the crowd) contribute incremental amounts of money, which can add up to a hefty investment.

There are four main types of crowdfunding:

• Rewards-based crowdfunding
• Equity crowdfunding
• Peer-to-peer crowdfunding
• Donation crowdfunding

For founders with a product they believe might appeal to a specific customer base, crowdfunding can also be a great way to gauge the public’s appetite for their product and business.

5. Startup Loans and Grants

Startup loans and grants have provided many UK entrepreneurs with the funding they need to get their business up and running. Unlike loans, grants are non-repayable. There are numerous funding schemes in the UK today that were created to support startups and early-stage businesses, including:

• CRACK-IT Challenges: A competition created to encourage collaboration between academics and businesses, CRACK-IT Challenges invites SMEs to develop a new product, or solve technological and scientific processes, with the winning applicant receiving a contract worth up to £1 million.
• Arts Council National Lottery Project Grants: A scheme providing much-needed support to organizations with a creative focus, such as art galleries or theatres, providing grants of up to £100,000.
• The Seed Enterprise Investment Scheme: A small business grant fund that enables companies to access up to £150,000 in investment. The scheme encourages investors to fund new ventures by offering tax relief to those who purchase shares.

6. Business Angels

A business angel is usually a wealthy entrepreneur with experience in building their own business empire, as well as providing financial backing. Angel investors ideally have operational experience and expertise that the business can benefit from.

In addition to financing, many business angels also provide advice and mentoring, helping entrepreneurs to establish, run, and scale their business, as well as offering the benefit of their connections, and the recognition of putting their name to the enterprise. Since investing in an unproven early-stage company incurs considerable risk, business angels seek high returns, however, and a founder may need to part with somewhere between 10% and 20% of the company’s equity to persuade a business angel to come onboard.