How to finance a business

Launching a new business doesn’t have to be expensive, but there are some costs that are unavoidable. 

Whether you’re looking to start freelancing or open an online store, discover how to finance your business using this guide by Countingup. We’ll discuss different ways of sourcing funding for your business, including: 

• Financing yourself and with help from those around you
• Financing from banks and government support
• Financing from private investors
• How Countingup can help

At Countingup, we want to empower new business owners and help budding innovators become successful. Discover how to make your new business a success below.

If you’re already trading and running a business and want to grow it further, you can use your own business’ net profit. For example, if you’re freelancing, you’ll have many of the elements needed already to reinvest your profits from customer sales.

This can be particularly helpful for small businesses as it means you can avoid taking on debt or selling equity in your business. It can also allow you to expand your business with its own organic growth. However, depending on what you need to take your business to the next level, your net profits may fall short, and saving can take a while.

Here, you can consider different ways of crowdfunding your business to help its finances. The closest option to you may be asking friends and family for money or loans for your business. Like before, this can help you avoid debt and help maintain full ownership of your business. However, this option may restrict you from reaching your ideal finance amount as friends and family may not have much disposable income to give away – even if you offer to pay them back. Additionally, mixing personal and business relationships can be difficult as money can be a sensitive subject. Therefore, make sure to approach your personal connections carefully and manage their expectations.

Another avenue for sourcing crowdfunding to finance your business is through online platforms like Indiegogo, Kickstarter and SeedInvest. These websites allow budding entrepreneurs to share their business ideas. In turn, interested customers gain special deals for generously providing funding. 

Online crowdfunding has been incredibly successful: Indiegogo and Kickstarter have collectively generated nearly 5 billion pounds of investment to nearly a million small businesses. Unfortunately, there is no guarantee that you’ll be successful as your crowdfunding campaign will require clever marketing, so other financing options should be kept in mind.

UK high street banks offer introductory business loans to many new businesses looking to get established. These loans can come either as secured or unsecured loans. 

Secured loans can be used for purchasing assets, like business premises, a vehicle, machinery or other large investments for your business. Secured loans work by using these as collateral whereby, if you’re not able to pay back your loan for whatever reason, your bank can use what you’ve bought to pay off the debt. You can also provide a loan guarantor (a family member or friend) who agrees to undertake the loan if you’re no longer able to pay it back.

Unsecured loans are more flexible but can come with higher interest rates because they’re not tied to anything. However, they can allow you to invest in multiple parts of your business, including marketing or product development costs. That said, unsecured loans are sometimes harder to apply for successfully as banks may be hesitant to loan money without collateral. 

If you choose to apply for a business bank loan, carefully consider how you will communicate your value and growth potential so lenders can be confident you will pay them back. Other options for smaller sums or shorter-term borrowing can include overdrafts and credit cards. Therefore, you have a number of options available depending on what you’d like to do to expand your business.

The UK Government also offers personal loans available at 6% interest rates for new entrepreneurs and come with free mentoring for up to 12 months. However, these loans are treated as personal debt, not business. Therefore, if your business is unsuccessful, the loan is sill tied to you personally. There may also be a dedicated business hub in your area with finance and operations advice. Use the gov.uk business portal to find out more. 

Government support schemes can be particularly viable options if you’ve been declined from the bank loans mentioned previously.

The final option for financing your business can come from private investors and venture capital firms. These individuals or firms seek to invest in small businesses and try to sell the shares they buy at a later date when they’ve increased in value due to company growth. Naturally, this funding option is only available to limited companies, as they have shares (or equity) to sell to potential investors.

This financing option can be advantageous as it gives you quick access to funding; however, it does mean your ownership of the company is diluted by however much you sell. Similar to the funding pitches with banks mentioned above, you’ll need to carefully and effectively communicate your business’ value and potential growth to be successful. If you’re considering this option, be careful not to sell too much equity in your company as your share of the profits and decision-making power may decrease proportionately.

Find out more about the differences in funding and finance management in our article Sole Trader or Limited Company: How to Set Up Your Business?

Make sure you understand your finances when you’re looking to secure funding.

Countingup is the business current account and accounting software in one app. With all your financial information in one place, Countingup offers real-time profit and loss data, so you can quickly and easily understand your business’ performance at a glance.

The app also provides automatic expense categorisation and a receipt capture tool, so you can make sure your accounts are always accurate. And with automated invoicing, you can save time and get paid faster.  Find out more here and sign up for free.