How do I get funding for a new business?

If your business needs equipment or vehicles but you don’t want to pay the full cost upfront, hire purchase or leasing may provide an alternative to buying outright.

With hire purchase, you normally pay a deposit followed by regular payments over an agreed period. The business generally becomes the owner of the asset once all the payments have been made and the conditions of the agreement have been met.

With leasing, you make regular payments to use the equipment or vehicle for an agreed period without normally owning it. What happens at the end of the agreement will depend on the type of lease and its terms.

Both options can reduce the amount you need to pay upfront, but you’ll need to consider the total cost, regular payments, length of the agreement and what happens at the end.

Banks and other commercial lenders offer different types of business borrowing, including overdrafts and business loans.

A business overdraft can provide flexible access to funds through your business bank account and may help manage short-term cash flow. Interest and fees may apply, and the lender can usually change or withdraw the facility, so an overdraft isn’t generally suitable for funding long-term investments.

A business loan provides an agreed amount that you repay, usually with interest, over a set period. Lenders will assess whether your business is likely to be able to afford the repayments before deciding whether to lend.

If you’re applying for a business loan, be prepared to explain:

• how much you need and what the money will be used for
• how and when you expect to repay the borrowing
• your expected sales, costs and cash flow
• the assumptions behind your financial forecasts
• the main risks to your plans and how you’ll manage them.

A clear and realistic business plan and financial forecasts can help support your application. If your business is new, the lender may also consider your personal financial circumstances and credit history, and may ask for security or a personal guarantee.

A Start Up Loan is a government-backed loan designed to help people start or grow a relatively new UK business.

Unlike a standard business loan, a Start Up Loan is an unsecured personal loan for business purposes. This means you’re personally responsible for repaying it. You’ll need to pass a credit check and demonstrate that you can afford the repayments.

You may be eligible if you’re aged 18 or over, live in the UK and are starting a UK-based business or have been trading for less than five years. Other eligibility criteria also apply.

As part of your application, you’ll need to provide information including a business plan, cash flow forecast and personal budget. Support is available to help you prepare your application.

If your application is successful, you can borrow up to the scheme’s maximum amount and repay the loan over an agreed period. You’ll also receive access to free business mentoring during the first 12 months of the loan term.

Check the Start Up Loans website for the current loan amounts, interest rate, repayment terms and eligibility criteria.

Crowdfunding involves raising money from a large number of people, usually through an online platform. It can be particularly useful for businesses with a product, project or idea that can attract interest from potential customers or investors.

There are different types of crowdfunding. Depending on the arrangement, people providing funding might:

• receive a product or other reward;
• invest in return for a share of the business;
• lend money that must be repaid with interest; or
• contribute without expecting a financial return.

To raise money through crowdfunding, you’ll usually need to set a funding target and create a campaign or pitch explaining your business or project. You’ll also need to promote your campaign and respond to questions from potential supporters or investors.

Crowdfunding can provide access to finance while also helping you test demand and raise awareness of your business. However, success isn’t guaranteed. Platforms may charge fees, some campaigns only receive funds if they reach their target, and some forms of crowdfunding involve taking on debt or giving investors a share of your business.

Find out more in our Crowdfunding guide.

Business angels are private investors who invest their own money in businesses, usually in return for a share of the company. This type of funding is therefore generally relevant to limited companies rather than sole traders or ordinary partnerships.

Angel investment is often aimed at businesses with significant growth potential. To attract an investor, you’ll usually need a strong business plan and financial forecasts and be able to demonstrate how the investment will help the business grow. Unlike a loan, the investment doesn’t normally have to be repaid through regular repayments. However, in return for funding you’ll be giving up some ownership of your company and potentially some influence over business decisions.

Business angels may also bring valuable experience, contacts and advice and some take an active role in the businesses they invest in. It’s therefore important to consider what an investor can offer as well as how much they’re prepared to invest.

Angel investors may invest individually or as part of an angel network or syndicate. Before accepting investment, make sure you understand the proposed valuation of your business, the proportion of equity you’ll give up and any rights the investor will receive.

Raising equity finance involves legal and financial considerations, so consider taking advice from appropriately qualified professional advisers before entering into an agreement.