MoneyMagpie

Sep 15

How to get funding for starting a business

Trying to find funding for starting a business, particularly without using a bank loan, can be quite complicated.

However, there are government initiatives out there, as well as other soft loan and grant opportunities, to help people kick-start their businesses.

Here is MoneyMagpie’s guide to these often quite confusing loans and schemes.

 

The Start Up Loans Company

Woman holding business card

The Start Up Loans Company is a government funded initiative that aims to support those starting a business in the United Kingdom by offering them a repayable loan and putting them in contact with a business mentor.

What is on offer?

Money

The company offers loans of up to £25,000 to give you a much-needed boost for starting a business. The average loan size is £6,000 but the company lends on the basis of each individual business’s needs. There is a fixed interest rate of 6% and the loan must be paid back within one to five years.

Mentorship

The scheme also provides you with a mentor to guide and support you in the early stages of starting a business.

You will get at least two hours of support in the first three months and then one hour per month afterwards.

You are encouraged to make the most of your time with the mentors and ensure that you plan for your meetings to get the most out of them, as these mentors are passionate about supporting entrepreneurs.

Exclusive offers

You will also be entitled to exclusive offers once you are on the scheme, for example – you can receive free accounting software and get discounts on eBay and PayPal.

Who is eligible for a start-up loan?

To be eligible you must:

  • be 18 or older
  • a resident of the UK with the right to remain in the UK for the duration of the loan term and the right to be self-employed
  • already have your business up and running, but trading for less than 12 months

Important note: You can not get a start-up loan and a New Enterprise Allowance at the same time, however you can apply for a start-up loan if your business needs more funding after the NEA, but it must be used to pay off the NEA loan.

How do you apply for a start-up loan?

To begin with, you must complete a basic application form to tell the company your contact details and the sector of business you hope to work in.

You’ll then be assigned to a delivery partner (an organisation with experience in supporting businesses) who will help you build up a business plan.

Your delivery partner will then decide whether you will receive funding; they will be looking for confidence, a good business plan and a good understanding of the figures.

For more information visit startuploans.co.uk.

 

New Enterprise Allowance

New business owner in front of coffee shop

For those on benefits who plan on starting a business, the government offers support and money via the New Enterprise Allowance.

What is on offer?

Money

The government offers a loan to help with start-up costs and a weekly allowance of up to £1,246 paid over 26 weeks. The loan has to be paid back, but the allowance does not.

The minimum amount you can borrow is £500 and the maximum is £2,500.

The amount you receive largely depends upon your eligibility and can be used to fund marketing or purchasing of equipment, vehicles etc. if they are an integral part of your business.

Three years to pay back your loan

The loan’s interest rate is 6-9% and must be paid back within three years, although it can be paid back in full at any time. There is also an opportunity for a 12 month interest only period if your business requires it. Payment would then commence in month 13 of your loan.

Any money you receive via this scheme does not affect your housing benefit, income tax, tax credits or Access to Work grant.

Weekly allowance

Your weekly allowance, which you do not have to pay back, is £65 per week for the first 13 weeks, and then £33 per week for the next 13 weeks.

Mentorship

The scheme provides you with a mentor who will help write up a business plan and develop your early ideas. They will then support you through your early stages of trading.

There have been complaints by those who have tried the scheme that they have not had much contact time with their mentor. This is important to bear in mind and probably suggests that you should feel confident gaining knowledge about business independently by researching.

Possible risks

You will be receiving the allowance instead of Jobseeker’s Allowance.

This has proved problematic for some people as you cannot apply for the loan until you are off JSA and there is the possibility that you may not be selected for the loan. This is risky as you are required to base your business plans on funding that you may well not receive.

As you have to sign off JSA to apply for the loan it is vital that you work closely with your mentor to ensure your business plan is viable.

All in all the New Enterprise Allowance offers great help for those wanting to start a business but how it is administered appears to be slightly problematic at the moment.

Who is eligible?

You must:

  • be 18 or over
  • have a business plan
  • be receiving either Jobseeker’s Allowance, Income Support as a lone parent or Employment and Support Allowance if you’re in the work-related activity group.
  • You don’t qualify, however, if you’re part of the work programme. 

How do you apply?

As soon as you are receiving one of the above mentioned benefits you can ask a Jobcentre Plus adviser to refer you to the scheme.

For more information go to the New Enterprise Allowance section on gov.uk or ask any questions you may have to your Jobcentre Plus adviser.

 

The Prince’s Trust Enterprise Programme

New flower shop owner

The Prince’s Trust offers a programme to help find out if self-employment is right for you, and offers a loan and training to help those starting a business.

Did you know….the television magician Dynamo began his career in magic being funded by The Princes Trust.

What is on offer?

Money

The Prince’s Trust Enterprise Programme provides loans of up to £4,000 .

Competitive interest rate

The interest is capped at 3% to help business start-ups. The loan must be paid back within one to three years.

Mentorship

They also provide training and one to one mentoring to help develop your business ideas and to access other opportunities.

Important note: The loan is there to help people who cannot secure a loan through other means and is not guaranteed.

Who is eligible?

To be eligible you must:

  • be between 18 and 30
  • unemployed or working less than 16 hours
  • live in the UK
  • have a strong business idea

You can’t qualify if:

  • you have a postgraduate degree
  • you’re on a gap year
  • you’ve been a graduate for less than six months
  • you hold a professional qualification.

How do you apply?

To apply fill out an enquiry form on their website by clicking here. If you are successful you will be invited to a two hour information session which will tell you where to go from there. There are several stages to go through to develop your business idea before you can secure funding.

For more information on the Enterprise Programme visit The Prince’s Trust website.

 

Angel investment network

Woman in her own clothing store

Started by two childhood friends from London in 2004, Angel Investment Network is an online platform that connects people who are starting a business with a range of investors who may be keen to invest in their ideas.

How it works

If you’re starting a business, it’s not unusual to find yourself somewhat at odds with the eligibility criteria for government funding options or bank loans. Loads of entrepreneurs seem to fall between the cracks of these two extremes, which leave many feeling disheartened.

The Angel Investment Network is one of various alternatives that manages to bridge this gap quite nicely, by offering you the opportunity to pitch your own idea online to a massive pool of investors from all corners of the globe. The site currently has more than 825,000 registered members with 148,567 of these being investors and 677,488 entrepreneurs.

Since 2004, the network has managed to facilitate £200 million for some of the coolest startups in the UK and across the world.

Who is eligible?

Pretty much anyone with a great startup idea and the dream of starting a business to those looking to expand their existing enterprises.

Just a quick scroll through the site shows business ideas that range from travel apps and boutique hotels, to autobiographical storytelling apps for families and halal dining clubs.

What is on offer?

Seed capital

Young companies and startups looking for initial financing, could expect business angels to provide seed capital of anywhere between £10,000 and  £40,000, depending on how good their idea and solid their pitch is. Not all investment necessarily comes from the same source, with various business angels often clubbing together to make up the amount needed.

Venture capital

What makes this network so great is the fact that it doesn’t stop at start-ups, but also offers opportunities for existing businesses with high earning potential to expand through further financial support. In these cases a group of investors within the network usually pool money in the £100,000-plus range for shares and a stake in the company’s operations.

Mentoring and support

In both cases, investors make themselves available to offer business expertise and contacts to help small businesses grow.

How do you pitch?

Draft a pitch

The most important part of the process is drafting a pitch that is both professional, and unique Keep in mind the sheer size of the Business Angels Network and that you will be contending with hundreds of thousands of other people who are starting a business of their own too. So, if communication isn’t your forte, get some professional help to write a pitch that is lively, informative, easy to read and, ultimately, attractive.

Sign up & submit your final pitch

Once you’re happy with your pitch, it’s time to head on over to the website, register your account and fill in the simple pitch form.

Identify and make contact with investors who you think would be a good fit

You may find yourself feeling a little disappointed when investors don’t start streaming in the moment your pitch goes live. Relax. Chances are you’re going to have to work a little harder than merely submitting your pitch. The site also offers you the opportunity to make contact with investors directly. Search for appropriate investors and send them a message with a link to your pitch. Don’t be shy and remember that confidence often just comes from faking it, till you start believing it.

Visit the Business Angel Investment Network website for further details.

 

Funding circle

Barbers

Funding Circle is a peer-to-peer lending marketplace that connects investors who want their money to go further with entrepreneurs who are working on starting a business or already have a small/medium-sized enterprise going. Since 2010, the online platform has facilitated the establishment of 26,000 businesses in the UK and approves a new loan every 6 minutes, on average.

How it works

Acting as the middleman, Funding Circle receives loan applications from small business owners through their website and helps those that are creditworthy get funding from investors, who simply use their online account to lend the money. The small businesses make fixed monthly repayments with interest, which then gets distributed to all the investors that lent to them.

Who is eligible?

Any small business with a good credit record, that also fulfills the following requirements:

  • A minimum of two years trading history
  • At least 1 year of filed or formally prepared accounts
  • No outstanding County Court Judgments larger than £250
  • UK ownership and resident directors: majority that are UK resident
  • A minimum annual turnover of £50,000 in your latest accounts

What is on offer?

Unsecured loans – typically up to £250,000

These are highly flexible loans that can be used for a wide range of purposes, including working capital, expansion capital, asset purchases and more.

Secured loans – typically up to £1 million

These loans can be used for a wide range of purposes and will allow you to borrow more for your business.

Asset Finance – typically up to £1 million

If you’re thinking about purchasing a new asset or refinancing an existing one, then this could be the best solution for you. We can also fund the VAT if required.

Property Finance – typically up to £3 million

We offer the full suite of property loans including finance for development and investment purposes, commercial mortgages and bridging finance.

Once you’ve made at least 3 to 6 months’ repayment on an existing loan, you will be able to apply for more.

How to apply?

Applying for a loan through Funding Circle is extremely quick and easy.

  • Start off by signing up and completing an instant eligibility check
  • Create a profile
  • Provide the nitty gritty details of your business
  • Get a quote, review it and pick the option that best suits your business
  • If approved, you will receive a loan offer within 24 hours
  • Once you’ve accepted, the funds will be transferred without issue

Visit the Funding Circle website to find out more

 

Reward/donation-based Crowdfunding

Woman in front of her shop

In recent years, crowdfunding has proven to be one of the most popular ways to raise capital for starting a business.

How it works

As the name suggests, this financing method relies on a large number of investing smaller amounts of money into a cause they support. This of course turns the traditional funding methods of asking a small number of people for large amounts of money, on its head.

This model is mostly online-driven, with those seeking funding setting up a profile describing their project on a website and those who want to back the cause, donating quickly and painlessly through the platform. Spreading the word via social media plays an integral role in gaining interest from people beyond your immediate circle of family and friends.

Who is eligible?

Crowdfunding is really open to anyone, but not everyone knows how to run a successful campaign.

Here are a few tips for getting the most out of your crowdfunding project:

  • You need to have a very specific outcome. I.e. you are starting a business that will bring good hairdressers to the convenience of clients’ homes and need money to buy a kit for each stylist
  • Set a specific and realistic funding target based on actual costs you’ve worked out
  • Have a time limit to create a sense of urgency
  • Offer your investors some kind of reward. There are two ways of doing this: either by connecting connecting your business to some traceable charitable outcome (for every £25 donation, you’ll give a free haircut to a specific homeless shelter) OR by offering small gifts in return (tote bags, t-shirts, sticker packs, discounts on services, tickets to your launch event are all popular options)
  • Share widely on social media and ask your investors to do the same

Top sites to check out

While there are many crowdfunding platforms out there, these are by far the most prominent with proven track records of successful campaigns.

Of course, these sites also need to make their money, so will require a fee of between 4% and 6% if your project is successful.

 

Borrowing from family/friends

Male carpenter

Although people often have a resistance again doing business with family or friends, sometimes it might be the only workable option you have when first starting a business.

Let’s look at a few things you should keep in mind:

Pros

Flexible terms

Friends and family members will often have a more lenient approach than banks or established investors. In many cases, they won’t expect you to pay back the money before it’s clear that you’re in a financial position to do so and may even allow you to do this interest-free.

Support structure

Sometimes the impersonal nature of financial institutions and big investors can be frustrating. When you get money from a loved one, this will often come with the benefit of personal interest and emotional support.

Building a legacy

It’s always special to be part of a friend/family member’s success story.

cons

Tax issues

It might be tempting to reach a loan agreement without the sorts of paperwork you may have to go through at the bank. However, it is in the best interest of both parties to set out the loan’s interest and repayment terms in a written agreement.

Possible abuse of familiarity

One of the awkward things about borrowing money from a close friend or relative is that you could be opening yourself up to criticism about spending habits. Be very careful about choosing the right person to do business with.

Feeling trapped by expectations

Of course you friends and family want your business to succeed – especially if they’ve invested money – however, don’t let this become an unnecessary source of worry and stress. It might be a good idea to schedule regular meetings where expectations can be managed on both sides.

 

Starting a Social Enterprise

Man using laptop

This will probably not be applicable to most, but if you are starting a Social Enterprise then it is easier to get funding that you do not have to pay back through grants. A Social Enterprise operates much like a business, in so much as they compete to deliver goods and services and generate income through trade. However the majority of the wealth is invested back into social and environmental causes.

The government defines Social Enterprises as “businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners.”

For Example

Types of Social Enterprises include The Big Issue, the Eden Project and the John Lewis Partnership

As Social Enterprises are community based there is a lot more potential for free funding. To begin looking for grants try grantfinder.co.uk and biglotteryfund.org.uk. The Big Issue Invest also offers loans from £50,000 – £1m for Social Enterprises.

The 2014 budget also made social enterprises a more attractive prospect for potential investors. Up until the budget, investors would have gained more by investing in small private companies thanks to the tax incentives offered by the Enterprise Investment Scheme (EIS).

However the government is now encouraging investment in social enterprises by providing the social investment tax relief scheme, which gives individuals a tax reduction of 30% of their investment , the same as it is for the EIS. This should help level out the playing field and make investing in social enterprises more appealing.

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