Since 2011, many small business owners have funded their start-ups using the government’s New Enterprise Allowance (NEA) programme, which granted up to £1,274 over a period of 26 weeks to unemployed people starting a business. However, as of January 2022, the New Enterprise Allowance programme has closed to new participants.
So, in 2022, what options are available to help you fund your new business? In this article, we’ll discuss the many ways you can raise funding for your start-up post-NEA, including bootstrapping, grants, loans, equity funding and crowdfunding.
Often, one of the most significant barriers to funding your start-up is being able to prove the viability of your business idea. Without this proof, you may struggle to attract investors or secure loans.
This is where the concept of ‘bootstrapping’ can be helpful. Bootstrapping refers to “a self-starting process that is supposed to proceed without external input”. In the world of business, this means funding the growth of your start-up using your available cash flows instead of external funding. In essence, you’ll reinvest the profit you gain from customers into your business to boost growth slowly and sustainably.
To start ‘bootstrapping’ successfully, you’ll need to make the most of the money you earn from customers because you’re starting with a minimal amount of capital. Therefore, you should focus on sending high-quality, detailed invoices to your customers to reduce the number of disputes and late payments, as this could interrupt your cash flow and make it harder for you to scale your business. Using an invoice template is the best way to guarantee the quality and consistency of your invoices – here’s a good example for those working in construction.
Once you’ve proven the viability of your business idea through bootstrapping, you’ll find it easier to secure loans and investments in the future. However, you should bear in mind that bootstrapping can be a fairly slow process, and it’s also not suitable for all types of businesses, such as start-ups that require a lot of initial research and development.
The idea of ‘free money’ can sound too good to be true, but with a business grant, this could become a reality for your start-up. In the UK, there are many grants you could apply for depending on the nature of your business, the region you’re operating in and whether you fit into an underrepresented group in business (e.g., women and ethnic minorities).
Applying for a grant can be rather difficult and time-consuming, but as long as you have a well-presented and comprehensive business plan, you’ll give yourself the best chance of securing the funding you need. To find the right grant for your start-up, check out Innovate UK Smart Grants, The Prince’s Trust, the British Business Bank and the government website.
The competition is fierce for grant schemes, so if you’re unable to get the funding you need through this avenue, then a business loan may be the best option. Unlike grants, loans must be repaid with interest over an agreed period of time, which means you must ensure that you can afford the monthly repayments.
Your liability for repaying the loan depends on the structure of your business. If you set up your business as a limited company, then you aren’t personally liable for repaying the loan, but sole traders will be personally liable. However, some banks require new limited companies with no track record to sign a personal guarantee, making you personally liable if your business doesn’t pay back the loan.
Overall, getting a loan is a very common strategy for start-ups looking for funding, but it does come with some risks. If you’re hoping to get a loan for your new business, then you could consider the government’s Start Up Loan scheme. By submitting a business plan and cash flow forecast as part of your application, you can borrow between £500 and £25,000 at a fixed interest rate of 6% per year and repay the loan over 1-5 years.
Friends and Family
Of course, if you can’t get a loan elsewhere, you could ask for help from friends and family. The people closest to you would be more than happy to help you achieve your dreams, but remember that accepting money from friends and family could spell disaster for your relationships if you end up unable to pay them back.
Generally, it may be best to avoid getting a loan from a friend or family member, but if you do decide to go down this route, then make sure you all understand the risks. You should also put the agreement in writing to help you avoid confusion or disputes.
Another option for those who can’t get a loan is selling equity to raise funds for your start-up. Equity refers to the value attributable to the owners of a business, so equity funding is all about raising money for your business through the sale of shares (equity).
As your business begins to make a profit, this money will then have to be shared with your company’s shareholders through the payment of dividends. Therefore, your shareholders will be incentivised to help your company so that they can make money, which means you could receive business advice from professional investors who buy shares in your start-up.
However, be aware that you’re selling part of your company to receive help and funding. This means that if you sell over half of your equity, you will no longer hold majority ownership within your business.
Venture capital funding involves professional investment companies that fund your start-up by buying shares and providing loan capital. Venture capitalists often take a lot of control over the direction of your company in return for their investment and guidance, so you need to consider if you’re happy with this type of arrangement.
However, venture capital funding is usually only a possibility for start-ups with high growth potential, which means it’s unlikely that you’ll secure this funding unless you’ve already attracted some seed funding due to a particularly innovative business idea.
Crowdfunding is a popular way to both raise funding for your start-up and gauge people’s interest in your products or services. By writing a strong pitch on a crowdfunding platform and outlining exactly why people should invest in your business, you can generate a lot of funding and publicity for your new start-up.
Seedrs is a crowdfunding website where new start-ups can show their business plan and encourage investors to buy shares in the company. Other crowdfunding platforms like Kickstarter allow you to raise funds without selling shares in your company. For example, if your business will sell products rather than services, you can secure funding through Kickstarter to manufacture these products. This will allow you to guarantee sales before you start the manufacturing process since investors have already bought your products beforehand.
Conclusion: Becoming a Successful Business Owner
Securing adequate funding is often one of the first (and most difficult) obstacles when starting a new business. Now, with the end of the government’s New Enterprise Allowance programme, it may seem even harder to raise enough money in 2022 and beyond.
However, even though this scheme is no longer available, this doesn’t mean that you’re left without funding options. By looking into loans, grants, bootstrapping, equity funding and crowdfunding, you’ll be able to find a solution that’s perfect for your start-up.