In 2013, 520,000 new businesses filed incorporation paperwork with Companies House; a rise of 8% on 2012 and a record high. The vast majority of these new businesses were small ventures launched by individuals. 2014 could easily see this trend continue. But what are the options available to those looking to set up their own start-up in 2014? We have set out below a list of finance options for those looking to go it alone this year:
1. Grants and loans
The Government’s Start-Up Loans scheme allows entrepreneurs with a good business idea to apply for loans of up to £25,000 to help them get started. The money has to be repaid over terms of up to five years, with interest payable at 6% a year. In addition, successful applicants get free business advice, which adds significant value to the loan itself.
There are also a number of other grants and loans that may be available (more information can be found at http://bit.ly/1fxFv3s).
2. Bank funding
Main high-street lenders are now emphasising their desire to work with start-up and will offer overdrafts and loan facilities to businesses which meet their lending criteria. Start-ups are also assisted by the fact that there are a number of new entrants to the industry, such as Metro Bank and Shawbrook, who offer a range of benefits to entice entrepreneurs. These include free business banking for an introductory period and personalised advice.
Furthermore, the Bank of England and HM Treasury has decided to extend the Funding for Lending Scheme (FLS) to January 2015. The FLS is designed to incentivise banks and building societies to boost their lending to the UK real economy. It does this by providing funding to banks and building societies for an extended period, with both the price and quantity of funding provided linked to their lending performance. This scheme has been extended with incentives to boost lending skewed towards small and medium sized enterprises.
3. Crowd funding
In recent years, increasing numbers of entrepreneurs have turned to crowd funding sites that enable entrepreneurs to pitch their ideas to a wide audience. Sites such as Seedrs and Crowdcube enable investors to buy an equity stake in businesses looking for cash. The venture gets the funding it needs, whilst investors hope one day to make a profit on their starting stake if the business is successful. Many businesses issuing shares this way, are able to offer investors SEIS tax reliefs.
Meanwhile, sites such as Kickstarter also enable businesses to simply ask for contributions towards the cost of setting up – donors may be promised benefits such as discounts on the business’ products, but not a financial return.
Funding Circle and Thin Cats are other examples which enable investors to offer short-term loans to businesses. These loans carry an interest rate agreed during the fund-raising process.
4. Angel Investors
For many small businesses, angel investors may be a more suitable source of start-up funds than a venture capital firm. Angel investors usually invest in amounts up to £250,000, which can provide most of a company’s needed start-up capital.
Angel investors are experienced in the field of business and can usually bring a great deal of that experience to any business venture. As one of the few investors in a start-up, angel investors may take a significant part in decision making. Angel investors, however, do expect entrepreneurs to handle the daily operations of business.
As opposed to loans and other forms of credit financing, angel investor funding can be a much cheaper form of seed capital. Angel funding does not typically require monthly payments on the capital and interest, aside from the portion of company profits apportioned to the investor. The ownership share allotted to angel investors typically starts at about 10/20 percent, but increases with the amount of funding invested in the business.
5. Friends and family
A popular source for start-up money is composed of friends, relatives and business associates. This makes sense as people with whom you have a close relationship with hopefully know you are reliable and competent and will grant you a loan based on the strength of your character. However, asking for financial help is not the same as borrowing money from a bank and whilst borrowing money from friends and family may seem an easy alternative to dealing with bankers, it can actually be a much more delicate situation.
It can be the case that your family members or friends may think that lending you money gives them a license to meddle and, if the business fails, the issue of paying the money back can be a problem and puts the whole relationship in jeopardy. It is therefore advisable to try and formalise the lending of the money by way of documentation so that each party knows the terms of the finance.
Although it is not a form of finance itself, the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) can make your start-up a much more attractive opportunity for investors.
The EIS is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase shares in those companies. There are a number of rules which your start-up must meet regarding the kind of company it is, the amount of money it can raise and when that much must be employed for the purposes of the trade. For further details on the EIS, please click here.
Your start-up may also be eligible for the SEIS which allows investors in your business to claim generous tax reliefs on funding of up to £100,000 each. To qualify for this scheme, your start-up must have been trading for less than two years, must have fewer than 25 employees, have assets of less than £200,000 and trade in an “approved sector”. For further details on the SEIS, please click here.
7. Combination of the above
Of course it may be that you use a combination of the options above to fund your start-up as only one of the options may not provide the capital your business requires. In this case, careful consideration must be given in terms of priority of repayment/security (as a number of the options above will require the granting of security over the start-up’s assets and even your personal property). Discussions will need to be had to ensure that each party is aware of their priority to such assets should they need to enforce their security over the relevant assets.
Having been founded by entrepreneurial lawyers, Fox Williams LLP is uniquely positioned to help you set up and grow your UK business. We are experts at advising entrepreneurs and businesses setting up new companies, and have a specialist Start Up team on hand who can assist you with all legal aspects of your venture. As we understand that budgets are often limited, we are also happy to discuss the services which we can provide on a fixed price basis.