Everybody understands that starting up a business from scratch is not a simple process or an easy challenge to take on.
Regardless of how lofty your ambitions are or whether you’re aiming to establish yourself as a sole trader or as a the boss of a burgeoning new enterprise, finding access to initial and early-stage sources of finance is a vitally important step along the way towards sustainability and success.
Here’s a look at some of the most commonplace and most viable routes to finance currently available to startup businesses and the entrepreneurs behind them.
1. Business grants and loans
Because startups are such important contributors to economic growth and the expansion of employment opportunities today, governments are often keen to allocate funds in support of their ambitions and their progress.
Applying for access to grants and low-interest loans from schemes backed by public funds, such as start-up loans, can be a relatively time consuming and convoluted process but it can also be a great way for startups to access funds that help set them on their way.
There are also of course commercial loans offered by an array of mainstream banking organisations and financial service providers.
Access to funds through these channels as a startup company has though become notably difficult in recent years as mainstream loan providers have become relatively reluctant to back new businesses which they tend to view as being a little too risky.
However, there is still scope for startup enterprises to access the funding they need for early-stage development via these mainstream channels. Reading ByteStart’s Guide on How to maximise your chances of securing a small business loan will help you do this.
2. Crowdfunding and peer-to-peer (P2P) lending
Crowdfunding and peer-to-peer (P2P) lending mechanisms have emerged in recent years to become some of the most important and viable ways in which startup companies can find access to funding during the early phases of their development.
Crowdfunding generally involves selling small equity stakes in a business whose founders are aiming to reach a certain level of funding in order to get their ideas off the ground.
There have been some high-profile successes in this online context but it is now being used routinely by an enormously diverse range of startups who effectively appeal to the crowd to back their business ideas in return for a percentage of the potential returns.
P2P lending is a similar but quite distinct process that appeals to investors who are keen to access strong returns on their outlays and are willing to back startup companies with that goal in mind.
The process is again carried out entirely online and involves startups outlining their enterprise ideas and illustrating their profit-making potential as convincingly as possible.
The terms of lending can then be hammered out between the two parties, with the aim of course being that the startup is able to grow and develop and pay back its financers along with whatever returns have been agreed upon.
3. Invoice finance
Another form of financing which can be an extremely valuable mechanism for startups in various circumstances is what’s referred to as invoice finance.
There are two different types of invoice financing, which are known respectively as invoice discounting and invoice factoring. Both relate to the process of selling an invoice which has been issued by one company to another for a price that’s less than the amount owed or which involves the payment of fees.
Clearly, in an ideal world, a startup would be in a position to wait for payments relating to their invoices to be paid in full but when time is of the essence and cash flows are tight, access to an upfront cash injection reflecting almost the full amount is often an attractive deal.
The distinction between invoice factoring and invoice discounting is that with the former it is usually the case that the buyer of the invoices will take over responsibility for ensuring payments are made by the invoice recipients. Whereas with invoice discounting, that responsibility remains with the issuer of the invoice.
4. Short-term loans
Because there is a widespread reluctance among mainstream lenders to back startups even where considerable growth potential has already been demonstrated, there has been a proliferation of what are referred to as being short-term lenders. These are providers of financing solutions who offer loans, usually to startups and small or medium-sized businesses, on the basis of relatively high interest rates.
It is preferable of course for startups or for any business to access loans that involve low interest rates but these tend currently to be extremely difficult to access.
So while the relatively high interest rates associated with short-term loans can be a deterrent, they offer the not inconsiderable benefit of being incredibly quick and easy to access, which for eager and ambitious startups can be an absolutely priceless advantage.
5. Cash flow loans
One of the biggest challenges that startup companies face as they look to develop towards sustainability is overcoming threats to cash flows that can arise quickly and without warning.
Even when great progress is being made by a startup in a number of its key operating areas, cash flow problems can arise very suddenly and completely scupper all the other good work that’s being done.
To offset the dangers of cash flow problems, startups can access what are now described as being cash flow loans which function essentially as an alternative to bank loans or overdrafts.
Here again, a key potential advantage for startups is that cash flow loans can be accessed online and there can be as little as 24 hours between a deal being agreed and the associated funds being made available.
Understanding your options
Whatever position your startup is in and whatever goals you have in mind, it’s important to know as much about your financing options as you can before taking the plunge and agreeing to the terms of a particular deal.
Time is often a vital consideration for startups that are eager to make progress and fulfil their potential but it’s essential not to rush into any form of financing deal without first having done whatever research is required to fully appreciate what is being agreed to and what other alternatives are out there.
About the author
This guide has been written exclusively for ByteStart by Keith Tully of Real Business Rescue, a leading corporate insolvency specialist. He knows what it takes to keep struggling businesses afloat and what qualities are required of company directors.
More tips on starting and funding a business
ByteStart is packed with help and tips on all aspects of starting your own small business. Check out some of our most popular guides;
Funding your business
- What to do when the bank says “NO”!
- How to get your customers to fund your business start-up
- What exactly are invoice finance and factoring, and what benefits can they bring to my business?
- What are business angels and how they can help fund your business?
- Finding finance for your new business – funding advice for start-ups
- The way to get paid – 12-Step Action Plan to stop customers from paying you late
- 8 signs that a small business may be approaching insolvency
- ByteStart’s Guide to insolvency, liquidation and bankruptcy for business owners
- Improve your cash flow – 7 ways to make sure your business gets paid on time, every time
- 10 late payment excuses used by customers – and how to deal with them
- 5 things you must do when you go self employed
- 10 advantages running your business as a limited company has over being a sole trader
- How to set up a limited company
- How to choose the best online accounting software for your business
- 15 Questions to ask when hiring an accountant for your new business
Money & Tax matters
- 10 ways small business owners can pay less tax
- Sole trader tax – a guide for start-ups and the newly self employed
- Dividend tax changes from April 2016 – A summary of the financial effects for small business owners
- ByteStart’s Guide to the main business taxes
- Corporation Tax – How to reduce your bill
- Which types of insurance must your business have?
- Becoming an employer – Your responsibilities when you hire staff
- Health & Safety compliance for small businesses – where do you start?
- A Guide to the National Living Wage for small business owners
- Why it’s vital you have clear ‘Terms & Conditions’ for your business