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Before equity crowdfunding becomes an option, entrepreneurs will often self-fund at the very early stages of a start-up. If you are a business owner looking for sources of funding, but not ready to start taking on debt, we have compiled a list of a number of alternative options that are available to you.
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Type of funding |
Description |
Advantages |
Disadvantages |
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Friends and family |
Raising capital through those who are close to you. This capital can resemble a gift, loan or even an equity investment. It’s a good idea to approach family and friends in the same way you would a formal lender: be crystal clear about your expectations as well as detailing the repayment level you can afford, among other things. |
Family and friends are likely to be flexible - on a practical level, they may offer loans without security or accept less security than banks. As your business might be so early-stage there is no proof it will take off, beyond the idea itself, you might be the only asset for the business, and who better to buy into you as a person than your nearest and dearest. Friends, but not immediate family, can also take advantage of S/EIS tax benefits. |
Transactions of this nature can be complex, with misunderstandings about the arrangement posing the risk of damaging relationships. There is a risk your investors may offer more than they can afford to lose, or that they will demand their money back when it suits them but not your business. They may also want to get more involved in the business, which may not be appropriate. It is important to have a shareholder’s agreement detailing your responsibilities for either party and that you both fully understand it before proceeding. |
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start-up grants |
Funds are available to small- and medium-sized enterprises defined as having fewer than 250 employees or with a turnover of less than £45,000. there are over £12bn in grant interventions on offer. Grants tend to be skewed towards anything that creates jobs, such as industrial sectors, or improvements to certain areas or regions. So, if your project or business ticks any of those boxes, then it is worth checking what is on offer |
Raising capital through small business grants are appealing as a result of them not having to be paid back. In essence, grants are, in many cases, free money. You also aren’t required to provide shares, enabling you to retain control of your business. |
However, every business grant scheme operates with different eligibility criteria. This requires a significant amount of your time to read through all the entry requirements. Different business grant schemes may be intended to fund different aspects of your business, so you need to make sure that your goals align with the purpose of the scheme you are considering. Yet even if your goals are suitable, you should also check how much capital your business might receive, since such schemes tend to impose limits on how much they'll provide, based on either a set limit or a percentage. They also sometimes require you to employ a certain number of people, specialise in a particular industry or open in a specific area such as a growth company based in Manchester which requires you to have a Manchester focus. |
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‘Bootstrapping’ |
Defined as essentially using your own resources, a bootstrapped business is one without any outside investment funds. The founder’s only investment capital might be personal savings – and of course, the time he or she spends working for free to get the business up and running. Bootstrapping requires ploughing the money earned from customers back into the business. |
Perhaps the biggest advantage of bootstrapping is that you stay as the boss. Self-funding your business means you only answer to yourself - you are free to do as you wish with the direction of your start-up. By bootstrapping your start-up, you can focus on doing what you do best without having to worry that you’re taking your company in someone else’s prescribed direction. |
However, entrepreneurs who use their own money or personal assets to get their start-up going take on huge personal risk. As your start-up rests entirely on you, if your business fails you incur the financial cost. But it's not just this. Without capital, the growth you experience could be incredibly slow. Bootstrapping your start-up most likely means you’re operating with limited resources and very little, if any, staff to help you. |
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0% interest credit card |
You may need to be careful here as certain credit card policies will not allow you to finance a business. However, it is very difficult for a lender to monitor this. You should check the policies of each credit card provider before proceeding. |
Some people with a good credit rating can get £10,000 per card in some instances. So, with 5 cards, for example, on 0% finance could provide a significant amount of capital with which to start a business. This is also credit that is not secured against your home. |
These cards are personally guaranteed by you, so if you default this will affect your credit rating. And if you do not pay debts off in the required time, the interest rates applied can be significantly high. Not only this, but most 0% interest is only available for purchases which is ok if you are, say, an online business. If you require cash or a cash advance, lenders often charge high amounts in addition to a fee. |
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Rewards-based crowdfunding |
This type of crowdfunding involves individuals contributing comparatively small amounts of money to projects in return for some kind of reward: this can vary from a thank you note to a produced version of the crowdfunded project |
There are a number of advantages of raising capital through this method. Specifically, there are fewer legal complexities than other types of crowdfunding such as debt. As well as this, there is the potential to create a future loyal customer base from those backing your project with an increased exposure to a broad online audience. |
Rewards-based crowdfunding, compared with other means of fundraising like raising venture capital, requires significantly greater investment of time-and-money into a campaign that could potentially fail and leave you with nothing in return.
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Tagged: Equity Crowdfunding Entrepreneurs Start-up
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