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The prospect of turning a business idea into an established enterprise is exciting. However, starting a new business can come at a significant cost. The first major hurdle entrepreneurs encounter is finding the capital to bring their ideas to life. Various funding options are available, and many founders accept funding from multiple sources. This article will break down the available funding types and explain some essential tips for choosing the most suitable funding options for your startup.
1. Evaluate Your Business’s Needs
Before looking at specific funding sources for your startup, consider what you need the funding for. You must have a clear understanding of your business’s needs. To evaluate your startup’s needs, consider aspects such as:
- your business’s short and long-term goals;
- how much funding you require; and
- the length of time you want the funding to last.
2. Understand Which Grants are Available to You
Many Government grants are available in the UK for startups and small businesses. It is worth checking your eligibility for government funding sources.
Government grants can be challenging to obtain due to their strict eligibility requirements. Many require the grantee to use the money for a specific purpose, such as purchasing premises. Furthermore, the application process can be lengthy, making grants unsuitable for those looking for quick capital.
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3. Consider Crowdfunding
Another funding option is crowdfunding. This form typically involves many people contributing small amounts into one pot. The four key types are:
- donation-based crowdfunding;
- rewards-based crowdfunding;
- debt-based crowdfunding; and
- equity-based crowdfunding.
For a successful campaign, you must craft a strong pitch and sell your business idea to potential backers. Each crowdfunding option carries different requirements for you and your business. For example, rewards-based crowdfunding requires rewarding those who back your campaign. Debt-based and equity-based crowdfunding are forms of debt and equity financing, which this article discusses further below.
4. Consider Equity Financing
Equity financing involves giving investors shares in your company. The following table outlines some different types of equity funding available to startups.
| Form of Equity Funding | Explanation |
| Angel Investment | Angel investors are individual investors who invest their own money into companies in exchange for a share of equity. |
| Venture Capital | Venture capital (VC) firms look to invest in startups that generate a sizable return on investment. Venture capitalists (and some angels) often aim to make a quick return on their investment before exiting. You should consider whether quick growth aligns with your startup’s needs and long-term plan. |
| Equity Crowdfunding | Equity crowdfunding involves raising capital from many individuals in exchange for shares. |
Another disadvantage of equity financing is losing ownership of your company, which can also mean losing control over your business. Carefully evaluate if giving up ownership is worth the capital gain.
5. Consider Debt Financing
When you opt for debt financing, you borrow money from creditors and are obligated to pay them back with interest. Bank loans are a traditional form of debt financing. Contemporary forms of debt financing that are often more accessible than bank loans include:
- peer-to-peer lending; and
- Government-backed startup loans.
Any form of debt financing has disadvantages. There is no guarantee that your business will be profitable within the repayment time frame. Consequently, you may risk your personal assets if you cannot repay your creditors.
6. Explore Multiple Funding Options
Many founders consider multiple funding sources to generate enough capital to start and grow their businesses. Explore all available options and determine which would work best for your business. Additionally, ensure you create a clear plan for managing the money once your business is operational.
7. Professional Advice
Choosing suitable funding sources for a startup is a crucial decision. For this reason, consider seeking professional advice. You may seek advice from:
- a startup lawyer;
- an accountant; or
- experienced business advisors.
Your investment in advisory services can ensure that you are fully informed at the start of your business journey and can make the right decisions. Experienced advisors can help mitigate future risks and increase your chances of success.
LegalVision’s Startup Manual is essential reading material for any startup founder looking to launch and grow a successful startup.
Key Takeaways
Generating capital to start your business can be complicated, but take it step-by-step. First, consider your business’s needs. Then, research the various options available, such as Government grants, crowdfunding, equity funding, and debt financing. It is advisable to seek professional advice to inform your decision.
If you need legal advice about funding options or your startup, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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