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Financing a business start-up

A basic guide on the finance options available to businesses and what to think about before committing yourself.

If you are trying to raise finance to set up a business or to expand a business there are various finance options available to you. The most common are:

Loans from family and friends

You should think carefully about the terms of any loans including:

  • the amount of the loan;
  • the dates for repayment;
  • whether interest is payable;
  • whether any security is to be granted to the lender; and
  • what rights the lender will have if any of these terms are not complied with.

It is important to bear in mind that even the smallest misunderstanding can affect your personal relationships and could jeopardise your business. By documenting the loan you minimise the risk of either party misunderstanding the basis on which the loan has been made and is to be repaid.  If a loan is being made to you as an individual, you should also make sure you take legal advice to ensure the loan does not breach consumer credit regulations.

Bank lending

You could consider approaching a bank for funding as some banks offer interest free or reduced rate business loans or overdrafts, whilst others have free software or business support packages. It is worth shopping around for the offer that best suits your requirements but make sure you consider what will happen at the end of any introductory period and bear in mind that banks often require personal guarantees, possibly secured by a charge on your home. The availability of low interest rates during the past year made this option particularly attractive to businesses, however, it is widely expected that interest rates will start to increase again soon, as a result of improvements in the economic environment.

During the Covid-19 pandemic, the Government encouraged financial institutions to make funds available for businesses that suffered hardships because of the pandemic via bounce back loans and the coronavirus business interruption schemes, however these initiatives ended on 31 March 2021.  On 6 April 2021 the government introduced a new Recovery Loan Scheme that is open to early stage businesses but the British Business Bank’s Start Up Loans programme may be more suitable where the loan sought is for less than £25,000.

Government grants and funding

There are a variety of Government initiatives to support businesses.  Whether these are available to you will depend on the nature of your business.

Venture capital investors

These are outside investors that invest money in your business in return for a share of the ownership. This can be complex and involve you giving away shares in your business. You should seek legal advice on the documentation as venture capitalist investors will ordinarily require that you enter into a sophisticated shareholder (or investor) agreement and articles of association to document their rights.

How can we help you?

We are experienced with all types of financing, from the very basic to the complex, and we regularly deal with businesses of all sizes, across all industry sectors. We understand that once you have secured funding you will want to finalise arrangements as soon as possible which is why we will always do what we can to facilitate a speedy transaction. We also have a team of experienced venture capital lawyers to guide you through the investment process.

If you would like to discuss your finance options in more detail please contact Alex Illingworth.