Finance for start ups | Business loans for big ideas

How to get financing for a startup business

min read

Finance

Can I get funding for a new startup?

Yes, if you’re just starting out, then there are specific types of financing designed for new businesses and startups. Start up financing is actually a huge industry, with startups in the U.K. raising $6.7 billion in funding during the first half of 2024. Like borrowing as an established business, there are a range of funding options available, some of them specifically designed for new companies, as well as government support.

However, it’s worth noting that startup finance tends to work differently from other funding. For example, one of the reasons that tools like crowdfunding or venture capital (VC) investing is popular for startups is because it doesn’t come with debt. A new business may not have a cash flow in place to service regular payments – equity finance offers funding in exchange for a share of the business rather than looking for direct repayment.

Types of funding for startups

Start-up business loans

Start-up business loans can be secured loans or unsecured loans, to help get a new venture off the ground. But founders can struggle to find firms willing to offer lending facilities to help build and grow untested businesses. This is because they're unlikely to have a record of trading that shows the business model is profitable.

More options become available the longer you’ve been trading, so if it’s possible to boot-strap the business (run it using funds you already have) in its infancy, many alternative lenders will be able to help once the company has a history of successful trading.

Credit line

‘Credit line’ is another way of saying ‘credit facility’. A line of credit is usually a form of unsecured lending, which means that the money you borrow is not secured against an asset. You will have to sign a personal guarantee, so be aware that this means you are both personally and legally responsible for repaying the borrowed sum. With lines of credit you can often top up your loan, so it's a flexible option that can help cover day-to-day expenses.

At iwoca we call our credit facility a 'Flexi–Loan', once approved you have 7 days to withdraw as much as you like up to your credit limit. The added benefit is that once you have repaid at least one third of your credit limit, you can gain access to more funds through your account. This will be subject to a quick credit review to make sure your business is still running smoothly and that we are offering the best loan possible for you.

Grants

There are lots of government grants available for small business start-ups. The majority of these are given to people looking to start a new business, with the big picture being job generation and a stimulated UK economy.

It will come as no surprise that the bigger the grant, the more complicated the application process and eligibility measures. At the very least you will need:

a solid business plan
a usage plan for the grant funds
a separate funding stream to match any fund offered
time to assess the criteria and apply to the most relevant grants

Government-backed schemes usually come in three forms. Direct grants are allocations of money to cover a start-up's very early costs. This might include buying equipment, paying staff, or investing in stock. Most will come with the understanding that your business will match half the grant's value with your own funds.

Equity finance is not technically a grant. Instead, the government allows a reduction of income tax on any investment in the new businesses of up to £100,000.

Finally, there's government-backed soft loans, which are essentially business loans with below-market rates of interest. They also come with flexible terms. The government's Start Up Loan scheme (above) is an example of this.

Start-up crowdfunding

Funding for your small business start-up doesn’t have to come from a traditional source, like a bank or a grant. One option worth exploring is crowdfunding.

There are lots of different kinds of crowdfunding but, in essence, it works like this: people who want to raise money can pitch for it by posting details of their business on a crowdfunding website. Members of that website's community then – through a variety of methods – have the ability to communally fund the project by pledging their cash.

The various kinds of crowdfunding include:

Equity-based – the lenders buy a stake in the company. For example, Crowdcube.
Loan-based – the lenders earn interest on the money they put forward. For example, Funding Circle.
Donation-based – the lenders donate money because they believe in the cause and want to see it succeed. For example, GoFundMe.
Reward-based – the lenders receive an exclusive reward or gift in exchange for their funding. For example, Kickstarter.

In all cases, it's key to have a detailed description of your business that will appeal to a broad audience. Again, that business plan is key. Try to put yourself in the shoes of your funders and ask yourself: how much money do you need? How will it be spent? What will the returns be? How long will those returns take to materialise?

Remember: be really specific about your goals, aim to inspire your funders and be professional.

Start-up angel investment and venture capital

A start-up angel investor can be a gift from heaven, albeit in a more ordinary form. Angel investors come in all shapes and sizes and need not be seasoned entrepreneurs or large venture capital (VC) operations. They just need to be someone with cash to invest in your business in return for a slice of the pie – who you're willing to invite into your business.

Think about all the potential angels you might know. It could be a wealthy former boss or colleague, a local business person who's shown an interest in promoting enterprises in the community. It might be an ambitious and vocal figurehead in your sector, or simply a member of your own family.

In general, the best angel investors come with capital, contacts and invaluable knowledge. But they will usually demand a percentage of ownership in your company, in exchange for their skills and credentials. This could be anything from ten percent to a partially controlling share in excess of 25 percent.

Venture capital is slightly different. For a start, VCs usually deal with large scale investment in high growth fields – such as tech. Unlike individual angels, to win VC funding you'll need to win over a whole firm – including investors, board members and startup growth specialists. A VC is interested in long-term growth, so they don't tend to offer "seed" or early-stage funding, but they will be looking for a stake in your organisation. That money isn't free, afterall.

Invoice Finance

Invoice financing allows businesses to unlock cash tied up in unpaid invoices and can be useful if your new business has run ahead of your revenue. A financier advances a significant portion of the invoice value, usually around 80-90%, shortly after the invoice is issued. Once the customer pays the invoice, the remaining balance is forwarded to the business, minus a fee for the service.

Benefits of Invoice Financing:

Improved Cash Flow: Access to funds tied up in unpaid invoices helps maintain smooth operations.
Quick Access to Funds: Businesses can receive money within a short period, often within 24-48 hours.
No Additional Debt: Unlike loans, invoice financing does not add to a company's debt burden.
Flexible Financing: The amount of financing grows with your sales, providing a scalable solution.

Scenarios Where Invoice Financing is Useful:

Seasonal Businesses: Helps manage cash flow during off-peak seasons when cash inflows are low.
Rapid Growth: Supports businesses experiencing rapid growth by providing necessary working capital.
Extended Payment Terms: Beneficial for businesses offering long payment terms to customers.

Merchant Cash Advance

A merchant cash advance (MCA) is a financing option where a business receives a lump sum payment in exchange for a percentage of future credit and debit card sales. Repayments are made daily or weekly, automatically deducted from the business's card transactions until the advance is repaid in full.

Advantages of Merchant Cash Advance:

Fast Access to Capital: Businesses can receive funds quickly, often within a few days.
Flexible Repayment: Repayments are tied to sales volume, so businesses pay more when sales are high and less when sales are low.
No Fixed Monthly Payments: Payments fluctuate with sales, helping manage cash flow.

Specific Requirements:

Card Sales Volume: Businesses need a steady volume of credit/debit card sales to qualify.
Short-Term Solution: Typically used for short-term financing needs due to higher costs compared to traditional loans.
Cost Considerations: MCAs often have higher fees and factor rates, which can be more expensive than traditional financing.

Pension-Led Funding

Pension-led funding allows business owners to use their personal pension funds to invest in their business. This is done by transferring the pension into a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS), which then invests in the business, typically through a loan or by purchasing company shares.

Benefits of Pension-Led Funding:

Control Over Funds: Entrepreneurs maintain control over their investment and can benefit from the business's success.
Flexible Financing: Provides an alternative funding source without relying on traditional lenders.
Potential for Growth: Can potentially increase the value of the entrepreneur’s pension through business growth.

Risks and Considerations:

Personal Risk: The entrepreneur’s pension is at risk if the business fails.
Regulatory Compliance: Must comply with pension regulations and rules governing SIPPs and SSASs.
Professional Advice: Essential to seek professional financial and legal advice before proceeding.

How to get a business startup loan?

Getting a business loan as a startup can be challenging but alternative providers such as iwoca can make it easier.

For younger businesses looking for finance, an iwoca Flexi-Loan could be just right. Borrow up to £500,000 over 12 or 24 months, or repay early for free to save on interest. Decisions are made in just one working day and you could have the money in your account within 24 hours.

How to apply for a business startup loan:

Apply in minutes – you can apply easily online and be approved within 24 hours.
Choose from fexible loan options – borrow money for as little as a day and up to two years.
Repay and manage easily – no early repayment fees or long-term commitments.

Our handy business loan calculator shows you what you could borrow, for how long and the likely monthly repayments.

Start-up funding quick-fire facts

Start-up loans for new businesses can be crucial methods of getting new ventures off the ground
Credit facilities provide flexible ways to borrow money
There are numerous government grants to help start-up businesses
Crowdfunding offers a non-traditional way to fund start-ups
Angel investors can help start-ups to flourish

Start-up business loans

Start-up business loans are highly sought after and can be a crucial element in getting a new venture off the ground. But founders can struggle to find firms willing to offer lending facilities to help build and grow untested businesses. This is because they're unlikely to have a record of trading that shows the business model is profitable.

You can get around this with a highly robust business plan, but sales records of some kind will still be crucial.

Alternatively, you can apply for a government-backed Start Up Loan on gov.uk for sums ranging from £500 to £25,000. This is an unsecured personal loan that the individual is liable for repaying. Successful applicants also benefit from support and guidance helplines, and even 12 months of free mentoring.

Credit line

‘Credit line’ is another way of saying ‘credit facility’. Put simply, it’s a flexible way to borrow money and can suit the needs of a small business looking for short-term start-up funding to cover various outgoings and overheads. Once approved, you’ll be given a credit line you can draw down from whenever you need, which can be used to pay for whatever you need.

A line of credit is usually a form of unsecured lending, which means that the money you borrow is not secured against an asset. You will have to sign a personal guarantee, so be aware that this means you are both personally and legally responsible for repaying the borrowed sum. With lines of credit you can often top up your loan, so it's a flexible option that can help cover day-to-day expenses.

Words by

Helen Nugent

Helen Nugent is a journalist, copywriter and lecturer based in Manchester. She‚Äôs written for publications such as The Times, The Guardian and the Yorkshire Post on a variety of topics from music to finance.

Article published on

January 24, 2023

Last reviewed on:

July 25, 2024

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