Funding and cashflow are the lifeblood of any start-up business, covering start-up costs and providing a basis from which you can create sales and make money. Cash is always king (or queen!) in your new business.
There are lots of different sources of funding for start-up businesses, but the options available to you can depend on lots of different factors, such as: the length of time your business has been operating; the sector your business is in (e.g. food and drink, life sciences, services and so on); and where you are based in Scotland (e.g. city centre, rural, with variations of support between different towns and cities).
Here is an overview of some ways to fund your business, and some of the terms you might come across as you start up.
This means funding your business through your own money and re-investing any money you make from sales back into the business. It’s a very common approach for start–up businesses and keeps costs low. You can read more about bootstrapping here.
You can also apply for grants to help develop your business idea. Grant funding is free, but there can be some restrictions on how it can be used and who can get it. For example, you may be limited in what the money can be used for, some grants may only be available for certain types of companies (e.g. technology companies) and there may be different grants available in different geographical areas. Grants are very useful at start-up, but sometimes it can take quite a while to prepare the applications and there can be a fair amount of reporting required, so you need to be organised. See here for more information on grants.
Crowdfunding means getting money from a large amount of people, ‘the crowd’ in crowdfunding. You can showcase your business idea using an online crowdfunding platform and you aim to win interest and pledges/donations from the people (investors) on the platform. There are a number of different crowdfunding platforms, including RBS BackHerBusiness, which specifically supports businesses launched by women entrepreneurs. Find out more about crowdfunding and whether it’s right for your business, here.
There are a number of business competitions for start-up businesses to apply to, in order to win business funding. The competitions can have some specific requirements you need to meet before applying, for example: the industry sector your business is in; if you are based in a particular business incubator, accelerator, university or college; or showing that you are innovating in some way e.g. creating a new innovative product, service or business model. Competitions can be great for getting extra money and free publicity but be careful that you don’t spend too much time entering lots of competitions and not working enough on your business. Just do a quick search online for ‘business competitions Scotland’ and you will see how many competitions there are! Have a look at Scottish EDGE and Converge Challenge too.
Banks offer a range of lending options that may be helpful for your business. These options include overdrafts, unsecured loans and loans that are secured against assets (i.e. things you own), including business assets and property. To get bank funding you’ll need to have a business plan detailing the business track record to date, goals and financial projections. Lending is usually only available to businesses that have been successfully trading for a while.
Business Angels are people who invest their own money in start-up companies in return for shares (equity) i.e. they own a piece of your company as a ‘shareholder’. Business angels may invest as individuals but more commonly they invest through groups known as ‘syndicates’. Investing as a group helps them to bring more support and money (‘smart money’) to companies, and also helps them spread their risk a bit over a range of investee companies. Angel investors can restrict their investments to certain sectors depending on their own experience and interests. Most are looking to invest in scalable, high growth companies. You can find out more about business angels in Scotland from LINC Scotland. Investing Women is a community of women angel investors based in Scotland and you can find out about other women angel investor groups across the UK from the UK Business Angel Association.
Venture Capital Funds (VC) invest in early stage, scalable, global businesses with fast, high growth potential. They take a share of equity in the business in return for funding i.e. they become a shareholder in your business. VCs are different to business angels in that VCs are investing money from a fund that they have raised from other organisations. The amounts of money VCs invest tend to be much larger than the amounts business angels invest i.e. many millions as opposed to hundreds of thousands. They look to invest in businesses setting up in emerging markets or capitalising on new technology/innovations which will disrupt markets and deliver significant competitive advantage and Return on Investment (ROI). You can find out more about venture capital from the British Private Equity & Venture Capital Association.