A Guide To Funding Your New Business Start-Up

Written by Jane Wardle on January 14, 2019

Updated March 9, 2022


Since 2011, the number of new business start-ups in the UK has increased significantly year-on-year, a trend many experts say is set to continue. Unfortunately, 40% of these businesses fail in the first five years, and cash flow (or a lack of it) is one of the major reasons. That’s why it’s important to get the right type and level of funding for your new business start-up.

How much does it cost to set up a new business?

This is an impossible question to answer because each new business is different. It’s much better to ask yourself how much it’ll cost to set up your new business. To answer this question, you’ll need realistic figures for your income and expenditure and to develop a financial forecast for at least a year in.

Consider who your customers are, how much they are willing to pay for your products or services, and how quickly they’re likely to pay you. Then look at what you’ll need to spend to begin trading, e.g. investing in stock, and keep operating, e.g. rent and rates.

It’s important to get your cash flow projections right. Don’t overestimate how much you’ll bring in, or how much it’ll cost to set up and grow your business. It’s much better to be overly cautious rather than overly optimistic, which would see you running out of money and going out of business. See how to deal with business cash flow problems.

How to fund your new business

Once you know how much you’ll need to set up your new business and begin trading, you can decide how you are going to find these funds. Options include:

1. Bank loans: One of the most popular ways to fund a new business start-up, you can apply for a long-term loan or a bridging loan. Bridging loans are short-term (usually up to 18 months) and work well if you need to cover gaps in your finances, if you need funding to fulfil larger orders and won’t get paid until these are delivered for example.

If you apply for a business loan, your bank will ask you for a copy of your business plan. They are unlikely to approve your application without one.

2. Friends and family: You could ask family and friends to loan you money to set up your business as opposed to a bank or building society, though this only works if they have the savings available to invest in your new start-up.

To protect everyone, including yourself, make sure you have agreements in place, including the size of the loan, how and when you’ll pay it back, and if these repayments include interest.

3. Remortgage: This is an option for homeowners with enough equity in their homes to borrow against. It allows you to raise a large amount of money quickly and you don’t need to produce a business plan before applying to your lender.

Remortgaging increases your monthly outgoings. You need to account for this in any financial forecasts because, if your business fails, your home could be at risk if you can’t make repayments.

4. Asset finance: If your business already has assets, equipment, for example, you could take out a asset loan against these. You’ll be subject to monthly repayments, which you’ll need to meet in order not to put ownership of the equipment at risk and can’t dispose of assets until you’ve repaid the lender.

If you’ve a commercial property, you could look at a commercial mortgage, which would free up equity in much the same way as remortgaging your home.

5. Credit cards: While you can’t necessarily cover all start-up costs for your new business with a credit card, you could use them to purchase items such as IT equipment and cover some business expenses. This could work well if you’ve low start-up costs or are a sole trader with savings to cover your salary.

If you don’t want to use a business credit card, you could apply for and use an overdraft. This might mean lower interest rates and could be a better option if you know a payment which would cover costs is due into your account shortly.

6. Government schemes: There are government schemes designed to support small and medium-sized enterprises, and start-ups find investment. These include the Seed Enterprise Investment Scheme (SEIS) for companies that are no older than two years and have less than £200,000 in gross assets.

There are four government schemes in total, each with different criteria. If SEIS doesn’t work for you, this doesn’t mean you won’t be eligible for other schemes. The government website has full details.

7. Crowdfunding: Over the last decade, this source of funding has become increasingly popular amongst start-ups and businesses looking to grow because it offers flexibility and a chance to reach a large number of smaller investors who believe in your products or services. By accessing funding from a wide range of investors, they reduce their risk while you are still able to raise the money you need to begin operating.

With crowdfunding, you’re releasing details of your business idea into the public domain, which could put your intellectual property at risk. Make sure any business idea has the correct intellectual property protection, e.g. trademarks, patents or copyrights, and that you read the terms and conditions of the crowdfunding site before sharing your idea.

Every type of funding has its pros and cons, and it’s important to consider these before deciding on who to approach to fund your start-up. In part, this decision will be based on the type of business you’re starting, the level of risk involved, and your growth prospect. If you aren’t sure which option is best, ask for professional advice from a business or financial advisor; these may charge a fee, but it will be worth it, in the long run, to make sure you’ve made the best decision for your new business.

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