Funding options for start-ups

Funding options for start-ups

January 21, 2013 by Erin Walls

Funding options for start ups/hands shakeThe business plan is going well, your idea seems to have feet but you face a major problem. You need money to get your new business off the ground.

Securing funding is one of the most common start-up problems. There are various ways to raise finance, which is a good thing, but many people are unaware of all of the options available to them or are unsure about how they work. Do your research to find out how you can raise the funds you need in a way that best suits your business. Here are the pros and cons of some key start-up funding options.

Banks and building societies

  • Amounts: Various depending on size of business and situation
  • What is this: Application for a loan submitted to the bank, which then decides if it will lend you the money
  • Pros: Tried and tested method with (usually) very transparent terms and conditions
  • Cons: These days, vey hard to secure, financials and a good credit history required
  • Tax incentives: No

Venture capital trusts

  • Amounts: £200,000 per annum to qualify for Relief
  • What is this:  Invest indirectly in a range of small higher risk companies whose shares and securities are not listed on a recognised stock exchange.
  • Pros: There are VCT companies out there looking for companies to invest in and it is a tried and tested method offering the incentive of tax reliefs to potential investors
  • Cons: Must be approved by HMRC and there are various conditions that have to be met
  • Tax incentives: Yes -   no tax on dividends from VCTs, income tax relief of 30% of amount invested; capital gains relief  (very brief summary; there are rules & qualifications to note)

Crowd funding and peer-to-peer lending

  • Amounts: Usually from £5,000 to 250,000 but can be for larger amounts
  • What is this: Individuals or companies can put in their funds in return for a share of equity in your business
  • Pros: Removes the risk of having one main investor, also the individuals investing may act as advocates and supporters of the business
  • Cons: More admin involved, as more investors to communicate with
  • Examples: Banktothefuture.com, Crowdcube, funding circle, Seedrs and Kickstarter, Zopa
  • Tax incentives: Many of the projects may qualify for EIS or Seed EIS schemes and entrepreneurs’ relief

Business Angels

  • Amounts: Various depending on the project and the Angel but usually below £500,000
  • What is this: You offer shares in your company for money from an Angel(s)
  • Pros: It can be a cheaper method and you could find an Angel with expertise in your industry who may add value as well as a  cash injection. They are likely to be much more ‘hands-on’
  • Cons: Depending on the funds you require you may end up giving up a significant share of your business, which can cause issues with control and strategy. You may not want a hands-on approach from your investor
  • Examples: Angel CoFund, Angelsden
  • Tax incentives: Possible qualification for EIS, Seed EIS and Entrepreneurs relief

Grants

  • Amounts: Various depending on type of project – industry and political agendas
  • What is this: Government bodies and charity groups or industry bodies reserve funds for specific grants which individuals or businesses can apply for; usually focused around innovation, energy saving and job creation.
  • Pros: Possible to obtain resources or funding at nil cost
  • Cons: Hard to find, process and conditions can be complex and confusing
  • Tax incentives: Depends on the type of grant

By Erin Walls of Ward Williams Chartered Accountants 

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