Sources of start-up finance

All businesses need money to get off the ground, but the way in which you raise this money is very important. There are numerous routes to access finance, all of which come with their own advantages and disadvantages.

Personal investment

Many experts promote putting personal money into a business as it tends to make entrepreneurs work harder; this is why private investors are more likely to invest in a companies where the owner has already put money in. There are a number of ways to put money in personally, including getting a second mortgage, an unsecured personal loan or selling items to raise capital. There are advantages and disadvantages to many of these, which we explore fully in our guide to investing your own money in a business.

Friends and family

Raising money from friends and family is a popular route as it has many advantages over traditional forms of finance. Flexible repayment schedules, improved terms and a faster turnaround time can help businesses get off the ground, but there are also disadvantages such as the strain that can be placed on personal relationships. If you do decide to take money from friends and family, it’s best to treat the transaction as if it were with a stranger and put everything in writing. Read our guide to raising finance from friends and family for more information.

Bank loans

Bank loans are a traditional form of start-up finance and remain popular. Preparing a bank loan application can be difficult and businesses are by no means guaranteed access to finance; you may be rejected several times before your application is accepted. Bank loans are typically secured, which means you could lose your property if unable to meet the repayment terms. If you’re considering applying for a bank loan, read our guide to business bank loans or how to prepare a bank loan application.

Private equity

Private equity involves giving away a proportion of your company shares in exchange for investment. This is an attractive option for businesses because they often provide not only financial backing but also expert guidance and support, which can be very useful to companies starting up for the first time. However, they will want a good deal and you can often give away more of your company and you may find some investors getting increasingly embroiled in how the business is being run. Read our guide to private equity for more information.

Grants

Grants are available from both the Government and independent organisations. These are often on very attractive terms; interest-free loans are common, as are straight out cash gifts. However, competition is fierce and not all businesses qualify for financial support. You’re also typically required to use the grant for a specific project rather than adding it to your assets. Please read our guide to grants for SMEs for more information.

Alternative finance sources

Entrepreneurs have access to more specialised forms of finance depending their personal circumstances. For example, the Black Business Initiative (BBI) supports firms started by black and minority businesspeople and may be able to assist financially. Alternatively, Prowess focuses on helping women succeed in the business environment. You may also be able to apply for finance from a community development finance institution (CDFI), local and sustainable organisations that exist to help underdeveloped areas become wealthier. This is a form of micro-finance – large amounts of capital are not available.