Small business funding: Alternative ways to launch a startup

For any budding entrepreneur, perhaps the first hurdle you need to overcome is how to raise initial funding for your startup.

Traditionally, it would be up to you to get small business funding, whether through your own savings or a startup loan from the bank. Many entrepreneurs actually depend on the latter, and the British Business Bank’s StartUp Loans programme has lent a huge £500 million to the UK’s small businesses since its inception in 2012.

But it’s never guaranteed that you’ll be approved for a bank loan, or that you’ll get the amount you need or want. In these cases, you’ll have to look to alternative sources for your funding. While small business funding comes with its own problems, depending on the option you need and want, these risks could be minor.

Unsecured guarantor loans

Obtaining a guarantor loan simply means having someone supporting your application, and can promise to repay any monthly payments you can’t make. A guarantor typically tends to be a family member or a close friend who you trust. For these loans, the amount you can borrow ranges between £500 and £10,000. This may seem like a minuscule amount when thinking about your small business funding, but remember that a loan doesn’t have to pay for every aspect of your business. Taking out a small loan could be enough to pay for a specific marketing campaign to get your brand out there, which in turn could bring in more business—and help you pay off your loan more quickly.

As with any loan, you need to find the company which offers you the best representative APR, so you’re not left owing more money than you need to. Currently, the UK’s largest provider of guarantor loans is Amigo Loans, so we recommend comparing APR rates against theirs using Finder. As with any internet purchase, make sure you check the Trustpilot scores too, giving you a sense of what previous customers have to say about the company. The last thing you want is an endless headache while dealing with customer service in exchange for what seems like a good deal, leaving you free to focus on running your business.

Angel investments

Angel investors are typically individuals who invest their own money into a startup company during its early stages, usually in exchange for equity. Many angels are accredited investors, giving you a little more security when working with them. However, an angel doesn’t have to be accredited. According to the UK Business Angels Association (UKBAA), angels collectively invest around £1.5 billion per annum in startups and early-stage businesses, making them a very viable option to fund your business.

Working with angels directly gives you and your business a huge range of benefits. In most cases, it’s a smaller risk working with an angel than it is taking out a loan, as you usually won’t be expected to pay back the money if your business fails. On the other hand, an angel will ultimately want to see your business succeed, as this will then boost their own profits, and make their investment even more worthwhile. If your angel investor made their riches from the success of their own startup, they may also be able to advise you on the best way to handle your business affairs.

The support offered by angel investors is something you won’t receive after taking out a loan, and this guidance may be hugely helpful to new entrepreneurs. However, it’s important to remember that by going into business with an investor, you will be giving up some level of control over your business. While you will generally remain a majority shareholder, you will still need to discuss any big decisions with your investor.

Crowdfunding

In the simplest way, crowdfunding means that you ask the public to pool money together for your business. This works by pitching your business plan to the public, usually on a dedicated crowdfunding platform like Kickstarter, to try and entice them to chip in. This allows any potential investors the chance to only invest a little portion of their money, minimising any risks. It can also be one of the quickest ways to get hold of some funds for your business. You can have a page set up and ready to go live within an hour. Your only worry after that will be making sure you share it online as much as possible.

Crowdfunding is a hugely popular choice for many entrepreneurs launching their first business, as it provides the opportunity for market research during the funding process. By taking comments from interested members of the public into account, you can also use this information to tweak the product or services offered, helping you provide exactly what your market wants and needs. It also serves as a form of marketing in itself. If your business plan really takes off and goes viral, your brand gets out there to potential customers and simultaneously raises the money required to make your business a reality.

However, you will need to take care to avoid over-promising on your crowdfunding page. If you get the funds needed, and then fail to deliver the goods—or they’re of a lower quality than what you initially promised—you could face a huge online backlash from disgruntled customers. This can then ruin your brand reputation, leaving you having to do some damage control.

Crowdfunding also opens your business up to competitors and leaves you running the risk of exposing valuable information such as intellectual property. Showing off a prototype design, or explaining what your product does, can easily open up your business to copycats, especially if you haven’t filed for copyright. The same thing happened to Fidget Cube, who then had to compete with knock-off products for a third of the price, after their initial fundraising drive on Kickstarter.