Sources of Funding for New Businesses

Did you know that 38% of start ups in the UK fail because they run out of money? This is why funding is so important. When starting up a new business it is easy to underestimate how much cash you will need to cover start-up costs.

Without enough funds, the promising business ideas you have in mind will be unable to go ahead.

The good news is that there are various funding options available for you to explore to kickstart your new business.

In this blog, we will explore the various funding sources for new businesses and understand their advantages and disadvantages.

Internal Sources of Finance

Internal sources of finance are funds generated within the business itself. They are often considered to be a cost-effective way to finance operations. A new business can use several types of internal finance, including selling assets, retained earnings, and personal savings.

Retained Earnings

Retained earnings are a key internal source of finance for new businesses and are profits that the business makes which are then reinvested back into the company rather than distributed out. This source of finance is highly beneficial for new businesses as retained earnings don’t come with interest charges or require the payment of dividends.

Selling Assets

Selling assets involves selling products and assets that are owned by the business. This may be something to consider when the business no longer has the use for the product or needs a source of funding as soon as possible. These assets can include machinery, equipment, or leftover stock.

Personal Savings

Personal savings are funds that have been saved up by the owner and are then invested into the business. This source of finance provides many benefits as it doesn’t cost the business due to there being no interest charges applied.

External Sources of Finance

External sources of finances are funds that come from outside the business. There are several methods a business can use, including, bank loans, overdrafts, hire purchase, government grants, and leasing.

Bank Loans

Bank loans offer a wide range of terms and conditions that can be tailored to meet the specific needs of the borrower. It can be beneficial to talk to the bank that you have a personal account with to get an idea on what they can offer.

This type of finance is often paid off with interest over an agreed period with the bank. As a business owner, if you are looking for a long-term source of finance, a bank loan is a beneficial solution by providing stability for several years.

Overdrafts

This type of funding is typically needed when a business or individual uses more money than they have in their bank account. This can be beneficial for businesses that experience temporary cash flow shortages as it provides them with immediate access to funding.

It is important to only use overdrafts in an emergency as they can become more expensive due to the high interest rates charged by banks.

Hire Purchase

If you are looking to purchase an asset for your business, such as a vehicle or piece of equipment. When hire purchasing an asset a deposit is often paid as an initial payment and the remaining payments are paid in instalments over time. The business does not own the asset until all the payments have been made.

Government Grants

A government grant is a fixed amount of money provided by the government itself. Grants are given out to businesses on the basis that they meet the specific criteria set by the government. This type of funding usually doesn’t need to be paid back.

Since 2012, more than £1 billion in funding has been given to new businesses through the UK government’s Start-Up Loan program. This can be a great option for new businesses in the UK.

Leasing

If you are unable to purchase assets upfront due to high costs, leasing is a great way to rent an asset rather than making a full purchase. When leasing an asset, you will pay the leasing company monthly payments until all payments cover the cost of the asset.

Alternative Sources of Finance

Family and Friends

New business owners can also seek financial support from family and friends. This type of funding may not need to be paid back or can be paid back with very little interest charges.

However, your relationship with family and friends could be impacted if you are unable to return the loan that they gave you. It is important that you are aware of the risks before using this as a source of finance.

Credit Cards

Credit cards are a popular choice as a short-term solution for covering expenses. They offer a convenient way to pay for purchases and services without having the need to carry cash. However, one disadvantage of credit cards is that they often have high interest rates, so it is important to pay off your credit card balance in full each month to avoid accruing additional costs.

Haggards Crowther Is Here to Help!

Securing financial support for your new business requires careful consideration of all the various options available. All sources of funding come with their own benefits and challenges and taking into consideration your business goals and needs will help you make the right choice.

At Haggards Crowther, we have a team of very experienced accountants and tax advisers who are always on hand to support you with your finances. Starting up a new business can be financially challenging, we are here to provide the support you need to gain access to the various financial options available.