Financing a business

Overview

The most suitable finance option for your business depends on many things, including:

  • how much funding you need
  • your current business revenue or if you’re a new business
  • whether or not you’re willing to offer personal assets as security – this can make it easier to get funding but is risky if you’re not able to maintain payments
  • whether or not you own a business property – this can make it easier to get funding
  • whether or not you’re willing to sell shares

This guide explains the different types of funding available.

 

Investment finance

Investment finance (also known as equity finance) involves selling part of your business (‘shares’) to an investor. The investor will take a share of any profits or losses that the company makes.

Advantages

Advantages include:

  • investors can bring new skills and opportunities to the business, eg marketing or exporting overseas
  • you won’t have to pay any interest, or repay a loan
  • you share the risks of the business with your investors

Disadvantages

Disadvantages include:

  • it can be a demanding, expensive and time-consuming process
  • you’ll own a smaller share of your business (although your share could eventually be worth more money if your business succeeds)
  • you may have to consult your investors before making certain management decisions
  • only limited companies can sell shares, so you can’t raise money in this way if you’re a sole trader or in a partnership

You should get professional advice about business finance.

Tax relief to investors

Some government schemes help companies raise investment finance by offering tax relief to investors:

 

Grants

A grant is an amount of money given to an individual or business for a specific project or purpose.

You can apply for a grant from the government, the European Union, local councils and charities.

You won’t need to pay a grant back, but there’s a lot of competition and they are almost always awarded for a specific purpose or project.

Advantages

Advantages include:

  • you won’t have to pay a grant back or pay interest on it
  • you won’t lose any control over your business

Disadvantages

Disadvantages include:

  • you’ll have to find a grant that suits your specific project, which can be difficult
  • there’s a lot of competition for grants
  • you’ll usually be expected to match the funds you’re awarded, eg a grant might cover part of the cost of a project but you’ll have to fund some of it yourself
  • grants are usually awarded for proposed projects, not ones that have already started
  • the application process can be time-consuming

Crowdfunding

Crowdfunding (also known as crowd financing or crowd-sourced capital) involves a number of people each investing, lending or contributing smaller amounts of money to your business or idea. This money will then be pooled to reach your funding target.

Your idea will usually be showcased through a crowdfunding website.

Advantages

Advantages of crowdfunding include:

  • it provides an alternative to funding from conventional means, eg bank loan
  • you can raise finance relatively quickly, often without upfront fees
  • it can raise awareness of your new business

Disadvantages

Disadvantages of crowdfunding include:

  • your idea could be copied if you haven’t protected it with a patent or copyright
  • any money you raise will normally be returned to investors or contributors if you don’t reach your funding target
  • crowdfunding is mostly unregulated (but from 1 April 2014, loan-based and investment-based crowdfunding will be regulated by the Financial Conduct Authority)

Find funding

You can look for either:

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