Almost every startup company will need some sort of external funding source to get going, but navigating the UK funding world can be quite difficult. Not only are there a lot of options that can seem almost identical, but there are many requirements and rules that can take some time to understand.
This article will hopefully get you started with exploring your different funding options, giving you the necessary information you will need to make the best decision for your startup, and providing a good basis for further research.
#1 – Crowdfunding
Crowdfunding involves asking a large group of people to donate or contribute small amounts of money, which will hopefully add up over time and help you reach your funding goal. These people can be practically anyone, from individuals wanting to support your startup to other businesses or organisations looking to invest in a promising venture.
There are a few different types of crowdfunding, which all work a little differently from each other. For example, some are regulated by the Financial Conduct Authority (FCA), while other types aren’t.
Both investment and loan-based crowdfunding are regulated by the FCA, as the individuals or businesses supplying the funding will receive interest or stakes in return. Most of the time, the funding suppliers will provide you with their terms, and some may not be as willing to negotiate them as others.
Donation and reward-based crowdfunding aren’t regulated by the FCA, and you are solely responsible for creating and negotiating the terms. They usually take place online, on platforms like Kickstarter or Crowdcube. Donation-based crowdfunding can simply consist of something called ‘good-will donations’, where individuals put money towards a cause without expecting anything in return. Reward-based crowdfunding, on the other hand, always promises something in return that’s linked to the project being supported.
One of the biggest risks associated with crowdfunding is not reaching your goal. Some people may demand their money back if the goal isn’t met, especially if that means they can’t receive a promised reward. Also, not everyone is keen to just put their money towards a cause that may never become successful, so convincing investors and businesses to crowdfund your startup may be very tricky.
You can check out the UK Crowdfunding Association’s website to learn more about crowdfunding.
#2 – Debt funding
Debt funding, or debt finance as it’s sometimes known, involves borrowing money to get your business started. This money can come from a range of different sources, including bank loans, startup loans, and online lenders.
Bank loans are the most well-known form of debt funding and are generally considered to be a quite safe option. Banks have to be transparent about any fees and the interest rates you’ll be paying, and they are usually much lower than what startup loans and online lenders will expect you to pay. However, bank loans can take a very long time to process, with requirements such as a detailed business plan, evidence of a successful trading history, and an almost spotless credit history making it much more difficult for newer businesses to access these funds.
Startup loans are funded by the UK government and have less restrictive requirements than bank loans. You can borrow up to £25,000, even if your business is completely new or has been trading for less than 2 years. While this amount may be more than enough for some, it may not cover everything if you’re not granted the maximum amount, so you may find yourself having to turn to other options alongside this loan.
Online lenders have the most flexible requirements, with some promising to process your application and allocate your funds within 24 hours. Many consider online lenders as a more modern and immediate alternative to traditional loans, with lower interest rates and higher approval chances. However, since online lenders are able to set their own lending policies, there is no guarantee that you will get the best offer possible – they can adjust the policy based on each case), targeted at small businesses and startup companies.
#3 – Incubators
In short, incubators are designed to help startup companies get on their feet by providing a physical workspace, training, and seed funding. While they may seem like the easiest funding option, incubators do come with potential risks.
These include hidden costs that may put you in more debt than you are prepared for, especially if your startup is still in its early days – some incubators may charge you additional fees if they’re still not sure whether your startup is worth the commitment. Also, the seed funding provided by incubators will usually be in exchange for equity in the company. This means that a percentage of your startup’s shares are given over to the incubator organisation.
If you want to look further into incubators, f6s offers some good resources. Don’t feel pressured by application deadlines or ‘too good to be true’ offers – take your time to research and evaluate whether an incubator is truly necessary for your startup.
#4 – Raising an angel round
Angel rounds or investors are a great option if your business is still in its early days, and is not eligible for a bank loan. You can get a pretty good deal out of angel rounds, though it can be quite competitive and daunting.
You’ll need to be able to successfully pitch your business idea in such a way that will inspire someone to invest their money in the venture. The more successful angel investors will have multiple companies competing for their funding, so you need to outshine your competition without making impossible promises – check out this blog post to learn the basics of a good business pitch: this is a good article on the principles of pitching.
Apart from pitching directly to angel investors, you can turn to companies or organisations to help fund and host your startup. They do everything from finding potential investors to coaching you on the angel round process, but they can charge a quite hefty fee for it all. Companies like Find Invest Grow promise to only charge you if your startup succeeds, and we recommend sticking to those types of companies if you can.
#5 – Raising a VC round
Venture capital rounds are investment funds that manage investors’ money, working for individuals looking to gain private equity stakes in startups. They’re often considered a high risk and high return opportunity, as they focus on startups that have great potential for both success and failure.
While nobody wants to admit that their startup may fail, VC rounds are your best bet if your startup has been rejected by other investors or loan providers for being too ‘high risk’. Most of the time, there won’t be any huge fees you’ll need to pay if your business ends up failing – investors are aware of the risk factor and are prepared to make a sacrifice.
However, the amount of money you will get from a VC round may be quite small in comparison to other options. VC investors put money towards multiple startups with the hopes of one succeeding, so they usually won’t be putting hundreds of thousands towards each and every startup.
If you’re interested in learning more about how VC rounds work, you can check out this article by Investopedia: It’s aimed mostly at American audiences, but it covers the basics pretty thoroughly and gives some great examples!
#6 – Government funding
Apart from the previously mentioned startup loan offered by the UK government, there is a huge selection of other government funding options. Below are just a few examples:
• R&D Tax Credits – This is a super reliable scheme that aims to help innovative startups that perform important research and development. It basically gives your startup a tax break by letting you reclaim up to 33% of your R&D costs, even if your startup ends up failing!
• Regional Growth Funds – This government funding aims to support projects that will provide lasting employment and contribute to positive economic growth within the UK. There are lots of different RGF programmes available, which cover many industries and business models. You can find a list of RGFs that are currently live on the UK government website.
• The Patent Box – This scheme allows some companies to pay reduced Corporate Tax on their profits, provided that they keep and commercialise intellectual property within the UK. While it may not be suitable for startups that haven’t been trading for long, it does provide a much-needed tax break for small and medium-sized businesses with big aspirations for the patents they use.
In conclusion, there are lots of different funding options for startups in the UK. Whether you’ve already been trading for some time, or you’re completely new to the startup world, there will always be some way for you to obtain the funding you need. We hope that this article has provided you with a good basis to continue your own research into startup funding!
Peter Azu is FI Group Managing Director. After 20 years as Tax Inspector at HMRC he has worked as an R&D Tax Specialist for several companies, accumulating 19 years of experience in the R&D tax incentives sector. He also sits on the Governments R&D Consultative Committee where he regularly meets with representatives from the Government, HMRC, and other industry leaders to both discuss and shape R&D policy in the UK.