What are the sources of financing that entrepreneurs use for their new businesses?

When starting up a business it can be easy to underestimate how much cash you will need to cover your start-up costs and see you through the first few months of trading until the business is generating sufficient cash through trading to cover expenditure. 

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Once you have worked out your start-up costs and prepared a business plan and cash-flow forecast you will know exactly how much funding you are going to require. If you don’t have your own funds to invest you will need to consider other sources of finance. This could be equity finance – investment; debt finance – loans/overdrafts; grants.

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Here are a few for you to consider: 

Family and Friends 

They may well be willing to help lend money to a new business starting up. This can be particularly good if they don’t want any interest repaid on the loan that they make to you. However, your relationship could be strained if you are unable to give them a return on the loan they gave you, so it's wise to ensure that they are fully aware of the risks. 

Bank Loans 

Most banks offer a selection of finance options for businesses looking to start-up. It's always a good idea to start by speaking to the bank that you have a personal account with to understand what they can offer you, what the interest rate and repayment term will be. It is common for a bank to want to see that you are also putting in some of your own funds into the business.  

Government-Backed Schemes

Businesses up to 24 months old can apply for a Government-backed personal Start- Up Loan of up to £25,000. As with all loan applications, you will be credit checked. The loan can be used for most start-up costs but cannot be used for training or debt repayment.  

Credit Unions 

There are over 500 Credit Unions operating in the UK and many of these offer business loans at low interest rates.

Local Authorities (Councils)

Occasionally Local Authorities may be able to offer financial support to business start-ups, including grants and loans. However, it is worth pointing out that grants are rare and those that are available do have strict eligibility criteria and are often aimed at certain business stages or sectors so may only be able to be used for specific purposes. Contact the Economic Development or Business Services department of your Local Council to see if they have any schemes that might be applicable to you.  

Crowd Funding

Crowdfunding has become more widespread and popular and is a way of financing that enables others to invest a small amount of money in a business. If a business is looking for investment it is usually matched with potential investors online via crowdfunding platforms.

Business Angels 

Business angels are private investors who want to look at ways of investing their money into new start-up businesses usually in return for shares or a stake in your business. They typically invest between £10,000 and £100,000. 

Asset Finance & Leasing 

Being able to finance a piece of equipment or a vehicle for your business through regular monthly payments may be an alternative to funding the initial costs outright. This can help you with cash flow at the start and also comes with tax benefits. 

Responsible Finance Providers

These types of organisations specialise in lending affordable finance to those who are unable to be supported through mainstream lenders such as banks.

Enterprise Agencies 

Enterprise agencies are independent business support organisations which as well as providing business advisory services can often have access to or be able to direct you to local sources of funding. The National Enterprise Network is a network of independent local enterprise agencies in England.

Now you've read the article, here are a few things you could do next...

• Chat live with a Business Advisor to find out more about these sources of funding - available 9am - 5pm, Monday - Friday (excluding Public Holidays)
• Book a business advice appointment
• Attend our free webinar, 'Finance and Bookkeeping For Your Small Business'
• Explore Wenta's grant opportunities via our business support programmes

I'm not going to tell you how bad it is out there for entrepreneurs looking to raise money. If you don’t know this by now, you probably ought to look for other work.

There is money out there, of course--there always is--but you have to know where to find it. You also need a sense of the strings that come with each flavor of capital.

I've found that entrepreneurs tend to fixate on one or two funding sources--often to their detriment. Better to keep all options on the table.

Here, then, is my prioritized list of sources, with some rules of thumb about each. With any luck, it will save you a lot of time and energy.

In Depth: Six Ways To Raise Cash Now

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1. Bootstrapping. Self-funding from your savings (if you have it) is always preferred. Advantages: no time going hat-in-hand to investors and you don't have to relinquish any control in your company. For more on how to bootstrap, check out Bootstrap Business by Rich Christiansen, who has launched nearly 30 companies by that method.

2. Friends and family. Tap your inner circle before expanding your horizons. As a rule of thumb, professional investors like to see real skin in the game--your own, of that of people who trust you.

3. Small business grants. This bucket often gets overlooked, but it should be a major focus thanks to the Obama administration's initiatives to foster new alternative-energy sources and other technological breakthroughs. Nabbing federal or state funds can be an exhausting gauntlet (check out "One Energy start-up's Tireless Quest For Capital"), but at least the government doesn't charge interest or demand control. One smart approach: Team with a professor at your local university. Grants associated with commercializing products are favored over ones allocated for academic study only. If a professor does the application with you and get to publish the results, that's a win-win situation.

4. Loans or lines of credit. If your company needs only a temporary or small infusion of cash, try for a Small Business Administration loan (offered at a lower interest rate because it is guaranteed by the government) or a bank line of credit. Warning: Commercial banks are often dismissive of start-ups unless you have personal collateral at risk--say, your house. (For more on understanding what bankers really charge, check out "The True Cost Of Debt.")

5. Incubators. A start-up incubator is a company, university or other organization that ponies up resources--laboratories, office space, consulting, cash, marketing--in exchange for equity in young companies when they are most vulnerable. (For more, check out "Getting The Most Out Of A Business Incubator.")

6. Angel investors. For those looking for $25,000 to $250,000, angel networks can come in handy. Networking is critical here, and you need to find angels who understand your industry and share your passion. I've been on the selection committee of an angel group for years. To get started, go to www.AngelSoft.net and look up the group nearest you. (For more on raising money from angel investors, check out "Ten Ways To Attract Angel Funding" and "Wooing And Choosing The Right Backer.")

7. Venture capital. As a rule of thumb, don't try this one in the earlier stages; in fact, don't try it unless you need more than $1 million. VCs take their pound of flesh in equity and control. It's not the most efficient route, either: Prepare to spend at least six months searching for and closing the deal. Start your search within your local network of entrepreneurs. After that, hit the National Venture Capital Association Web site.

8. Bartering. Exchanging goods or services as a substitute for cash can be a great way to run on a little wallet. Example: trading free office space by agreeing to be the property manager for the owner. This technique can also work with legal, accounting and engineering services. (For more, see "Nine Effective Bartering Techniques.")

9. Form a partnership. A more established company may have a strategic interest in helping to develop your product---and be willing to advance funding to make it happen. I know several companies that develop customized social networks for large enterprises, with the expectation of using that funding and experience to compete in the consumer market some day. Licensing may not be as sexy as being a consumer brand, but it will cost you a lot less. (For more on navigating partnerships with large companies, check out "Top Tips: How Not To Bet Burned By The Big Boys.")

10. Commit to a major customer. Some customers would be willing to cover your development costs in order to be able to buy your product before the rest of the world can. Their advantage: control over your production process (to make sure it meets their requirements) and the promise of dedicated support. Even large companies look to their best customers to fund new projects--this is the essence of good business development.

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