Starting a business in the UK can be tough. The most difficult thing other than finding a business idea is financing. The problem is usually big because of statistics are not usually in the entrepreneur’s side. This is because data shows that most new businesses fail. Therefore in this article, we will look at the various UK business financing strategies.
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Different Types of Business Financing
Business financing can be very broad. Thankfully, there exist solutions for all sort of business and financing. From small business financing / business financing for startups to business financing for large corporations. Examples include business financing for vehicles, business invoice financing or business credit financing, unsecured business financing, business financing for equipment via lease, business financing with bad credit and business expansion financing. If you’re looking for financing help you can also consider hiring business financing services by getting a loan broker that does the work for you.
Why Companies Seek Financing
There are several reasons why companies seek financing. Many new entrepreneurs seek financing to get their business up and running. If they are retailers, they use the funding to buy inventory. If they are manufacturers, they use financing to open their plants. If they are fintech companies, they use the funding to hire developers. Companies also seek capital for intellectual property reasons. Intellectual properties include things like patents, trademarks, and copyrights. Filing a patent with the government office is usually expensive and time consuming. Other companies raise capital to hire employees. In the United Kingdom, the minimum wage is more than €1,500 per month. This is a heavy burden for people who are starting their businesses. Others raise money to ramp-up marketing and to expand their businesses.
Types of Business Funding Options
Businesses in the United Kingdom have many options for raising money. All these ways are divided into two:
Debt Financing
Debt financing is a situation where the company borrows money from a bank. A good example of debt financing is a business loan. When a company takes a loan, they should pay it every month. The lender makes a profit from the interest the loan generates. There are several benefits of debt financing. First, the company does not give a stake to the lender. Second, the cost of borrowing is relatively low. This is because the Bank of England (BOE) has left interest rates very low for years. Third, banks don’t influence how the money is spent.
Equity Financing
Equity financing is when an investor gives money to a business in return of equity. This can be a form of business financing for startups. For example, if you believe that your business is valued at $1 million, an investor can give you $100k and own 10% of the company. Equity has several advantages. First, you don’t pay any monthly interest to the investor. Second, investors can continue adding money to the business to make it more successful. Third, investors can bring their experience to your business.
How to Finance UK Business
There are several ways to finance your business in the United Kingdom. Here are the most popular ones.
Bank Loans
The most popular method of raising money for a company is through local UK banks. For instance, a bank such as Starling bank offers unsecured loans for businesses in the UK and Atom bank offers secured business loans in the UK. There are more than 300 banks in the United Kingdom. Most of these banks make money by offering loans to consumers and businesses. As explained above, a loan is a form of debt financing. This means that you will pay interest on the loan you take. Interest rate in the UK is expected to remain at 0.10% by the end of 2021. Loans are easy to take if you have already started your business. It is significantly tough if you are yet to start the business. This is simply because banks tend to fear that your business will not succeed. However, they can lend you money if you have a collateral. Some of the best banks in the United Kingdom are Barclays, HSBC, Halifax, and Lloyds Bank among others.
Venture Capital
Venture capital is money that is borrowed investors who are known as venture capitalists. This is a very common method of raising money. In 2019, venture capital grew by 44% in the UK. It grew faster than in the United States and China. In total VCs gave out more than $13 billion to UK tech companies. If you have watched Shark Tank or Lions Den, the funds these people give out is venture capital. Venture capital firms don’t expect to make money right away. Instead, they invest in promising companies and hope to make money when the company goes through an initial public offering (IPO). This is the way companies like Facebook and Twitter were funded. Some of the biggest venture capital firms in the United Kingdom are Octopus Venture, Notion, and Atomico.
Here are a few tips to raise money using venture capital:
- Prepare a pitch deck. This is a small document that gives a detailed description of your company.
- Have a working prototype. If you are a new company, have a prototype that is working.
- Be revenue positive. Have a business that is making some money.
- Be reasonable. Seek a reasonable valuation. For example, no VC will give you $100k for 0.5% stake in your company.
Initial Public Offering (IPO)
Did you know that London, not New York, is the financial capital of the world? Another way you can raise money for your company is to issue an IPO in UK. An IPO is when you sell the company’s shares to investors. You can do this by listing the shares in the London Stock Exchange (LSE). An IPO is ideal for a company that is making money. It does not necessarily need to be profitable. In an IPO, you work with bankers and advisors and finally list on the exchange. The LSE has the Alternative Investment Market (AIM) that targets small companies that don’t have the resources of very large companies.
There are several benefits of an initial public offering:
- Brand. It helps improve your brand. Public companies usually appear to be more credible.
- Easy financing. As a public company, you can easily raise money by selling more stock.
- Exiting. It is easy to exit the business by selling shares to other investors.
- Stock options. You can save money by paying your staff through stock options
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Other Ways of UK Business Financing
There are other ways of financing your company in the UK. These are:
- Family and friends. Your close family members can help you raise money for your company.
- Peer to Peer lending. You can borrow money from peer to peer lenders such as Funding Cirle.
- Selling assets. You can sell your assets to fund your business.
- Grants. You can apply for business grants from various organizations.
Summary
Starting and running a business in UK is usually difficult. One of the hardest tasks is usually to raise money for the business. In this article, we have looked at the various options of raising money in the UK. We recommend that you always consider the interest rates you will be paying and the stake you are giving away.
