13 start-up financing options (and a four-step how-to guide)
By Indeed Editorial Team
Published 6 July 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Funding can determine whether a start-up succeeds or fails. There are several ways of financing a start-up other than using personal savings. Understanding funding options can help you know where and how you can get funding for a business or project. In this article, we define what start-up financing options are, discuss different options to finance a business and cover how to prepare a business for funding.
What are start-up financing options?
A start-up financing option is a source of capital to start a business. There are various types of financing options for start-ups, including loans, investments, savings or donations. Some financing options generate more capital than others and it's important to analyse all of them before deciding on one.
Start-up financing options
There are different start-up financing options that can help a business gain capital. Some examples include:
The first investors are usually the founders of the business. It's possible to use personal savings or assets as collateral. Using personal investments in a business can show investors and other stakeholders long-term commitment to the business. It can also show them the business' willingness to face associated risks.
A guaranteed loan is where a third party guarantees that a business can pay and assumes an obligation for the loan if they default. Guaranteed loans can be ideal for businesses that don't qualify for bank loans, lack a trading history or have assets to leverage for bank loans. It's common for small start-ups to seek guaranteed loans. Such loans may also have lower repayment schemes than other loans.
Bank loans are capital investments that start-ups or businesses can get from banks and repay at an interest rate within an agreed period. They're a suitable option for businesses with a good relationship with the bank. The bank may require the business to present a well-researched and convincing case to qualify for the loan. It's helpful to research the types of loans a bank offers, their interest rates and other terms. A high credit score can influence some banks to lower their interest rates.
Research and development grants
A grant is a free investment a business can get from a public entity like a university or the government for a start-up. Entrepreneurs can receive grants as direct cash. Some government grants may reduce the business' tax liability. A significant advantage of seeking grants is that they do not have repayments.
Incubators and accelerators
An incubator or accelerator is a programme that can help a start-up grow. Such programmes can provide mentoring, networking support and seed investments for a stake in the business. Incubators or accelerators also offer valuable expertise and structured training in entrepreneurship and developing a business.
Angel investors fund a business for equity in the business. Some investors work in groups and others work alone. Angel investors can offer a business guidance, advice and valuable experience. These investors differ from venture capitalists because angel investors usually invest in a business in its early stages. Venture capitalists can invest in businesses that have already developed. They also usually invest more money than angel investors. Both investors may focus more on businesses with high growth potential. Here are some of the other qualities angel investors look for in start-ups:
integrity, passion and commitment of the founders
clear and well-researched business plans
innovative or interesting intellectual property or technology
reasonable terms for investment
Friends and family
Friends, parents, siblings or other family members can invest in a business in its early stages. Family and friends can provide a quicker funding process and flexible terms. This can also be an opportunity for them to invest in a viable business plan. Family and friends may not understand investment risks, so it's important to teach them before they invest. It's also important to make sure that the friend or family member can support the business without sacrificing their financial and overall well-being.
Crowdfunding is raising investments from multiple investors through a crowdfunding platform. As entrepreneurs also raise funds from the crowd, this presents them with an opportunity to market their products or services. It's easy to set up a crowdfunding campaign by simply visiting a crowdfunding site, setting up a profile for a business and choosing how much you want to raise. A crowdfunding campaign can be reward-based or equity-based. Reward-based crowdfunding is where the crowd typically invest in the business for some kind of reward. The reward can be product samples or an experience of the service.
Equity-based crowdfunding is when the crowd invests in the business and gets a profit share or equity in return. Crowdfunding campaigns can help start-ups raise up to millions of pounds. Some crowdfunding sites charge a processing fee or deduct a percentage of the amount a business raises.
Venture capitalists provide funding for a start-up in exchange for a share in the business. Their primary aim is to earn a good return on investment within a compact time frame. To achieve their goal, they support the business with advice or experience to help it grow quickly. Venture capital investments are a suitable alternative for businesses that are able to give up equity to get investments. It's beneficial for the entrepreneur to look for venture capitalists with excellent knowledge, relevant experience and a wide network to help market the start-up.
Short-term loans are loans with a shorter repayment window. Start-ups can use them to start a project, boost cash flow or improve working capital. This can be an ideal funding approach for businesses that want to bridge a capital gap and are confident about repaying money on time. Short-term loans also offer a quick funding process. It's beneficial for entrepreneurs to assess various short-term loans to get the most favourable terms. This is because the interest on short-term loans can be higher than loans with a longer repayment period.
A common example of short-term loans is account receivable loans. These are loans that a business can get from alternative lenders rather than from banks. The entrepreneur leverages the loan with money awaiting debit in accounts receivable. For example, a loan can supply a company with products worth £150,000. The company then takes two months to make the payment. Businesses can take a short-term loan to cover their current needs and offer part or whole of the incoming payments as collateral.
Various governments may have programmes that can help start-ups raise capital. Programmes may focus on specific groups of people based on location, income level, start-up fields or minority status. Some government programmes may provide loans, equity or grants. The programmes may also offer extra benefits such as advice, expert support and recognition awards.
Product pre-sales can be a quick way for a start-up to raise capital. For example, a record label can have pre-orders for a new album. Product pre-sales can increase capital allocation and demand for products.
Partner financing is like venture capital or angel investments but more strategic. Entrepreneurs find partners who offer to fund in exchange for equity or royalties. The strategic partner can offer funding for distribution rights, special access to services, staff or products, ultimate sale or a combination of these. Royalties refer to the percentage a partner gets for every product sale.
The partner can be an individual or company. Start-ups can even partner with businesses in the same industry. It's beneficial for the start-up to partner with a larger company because they can access their partner's customer base, marketing programmes or sales personnel.
How to prepare a business for funding
There's more to receiving funding for a start-up than simply filling out an application. Here are some tips to help prepare for start-up financing:
1. Identify the required amount of financing
In terms of the business plan and financing alternatives, it's helpful for a business to be clear about the amount of money they need. Entrepreneurs may find multiple loan alternatives. It's efficient to borrow only what the start-up requires. Some institutions may have penalties for early repayments or failure to use the whole loan.
2. Write a simple business plan
A clear business plan can guide the activities of a start-up. It can also help identify what the business needs and ensure smooth operations. Some financiers may also require a business to present a business plan.
3. Conduct thorough market research
Market research can help an entrepreneur understand the conditions of a specific industry. It can also help to prove to investors that the industry is in demand or has opportunity for growth. Knowledge of the industry can help earn the trust of investors.
4. Assess a business' sources carefully
It's important that a business assesses its sources of financing carefully. Some investors may offer more than others. A start-up may consider those that offer guidance, knowledge and expertise. This can also help preserve relationships if a start-up is cautious of receiving financing from friends and family.
Explore more articles
- 13 low investment business ideas and how to start one
- How To Change Careers: What Steps To Take
- A First 100 Days Plan Example (and How To Develop Your Own)
- Nursing entry requirements (with specialisations)
- How to Become a Music Producer
- A guide to 18 great business ideas for new start-ups
- Interim job meaning (plus what to expect in an interim job)
- Studying physiotherapy: entry requirements and skills
- Setting up a home office: a step-by-step guide (plus tips)
- Top Questions You Can Expect During an Exit Interview
- 8 career change obstacles and how to overcome them
- A Step-by-Step Guide on How To Quit A Job You Just Started