How to Fund Your Business Idea

Learn about common fundraising approaches and the challenges companies face.

Updated: May 20, 2024
Matt Crabtree

Written By

Matt Crabtree

CompareBanks is reader-supported. When you click through some links on our site, we may earn an affiliate commission. Learn more

In the United Kingdom, cash flow issues are responsible for the failure of 90% of small firms. Among the 5.2 million plus SMEs in the UK, a large number of them continue to struggle due to finance issues.

The difficulty of securing funding only increases for companies that now exist only in the form of an idea or conceptual plan — without proof of profitability. 

Your specific business idea will determine the scale of investment required to get it off the ground — although some argue it’s best to launch cheaply, and get the smallest scale of evidence needed to continue. 

In order to get started, all you might need is a laptop and access to the internet for other businesses — for example, a small digital app company; in which case, you might only need programming and the right technology — you might even be able to handle that yourself at the beginning depending on your skill-sets.

Businesses that require funding

Business owners sometimes do most of the work themselves initially, then use revenue as leverage to outsource and attract investors. 

On the other hand, it's possible that launching your firm may require a significant sum of money right from the outset.

For instance, a manufacturing company may need to have access to costly equipment and tools, as well as a specialised factory or workshop location — once there is evidence that the idea is desired (one example is a Kickstarter campaign using a test product).  

Lack of funds should not be a stumbling obstacle. Many entrepreneurs, despite their intelligence and drive, don't know the first thing about raising capital for a new venture and would rather concentrate on perfecting their main product.

When you have a brilliant concept to focus on, it's understandable that researching potential sources of financing could seem like a waste of time. 

Regardless, excellent ideas can only reach their full potential with consistent talent, access to a pre-existing revenue stream, and/or funding.

Selecting your funding strategy

There are two primary ways for a company to get capital:

  • Debt-free financing: In the absence of any debt, all funding comes from either personal savings or in-kind contributions (such as shares of stock, a funding campaign like Kickstarter, or a one-of-a-kind product).
  • Debt financing: Is taking on a loan and promising to pay it back, together with interest, at a later date. Learn more about start-up loans.

Debt finance and debt-free funding both have their benefits, but most entrepreneurs employ a hybrid of the two. The primary benefit of debt-free financing is that it frees up cash flow for expansion, rather than draining it. Debt finance, on the other hand, never necessitates relinquishing control.

In most cases, a startup founder may decide whether or not to pursue debt or equity funding. The predicted cash flow of the firm, the founder's desire to preserve ownership, and the availability of other financing options all factor into the decision. 

If you have little company expertise and want to avoid taking on debt that you may not be able to manage, a zero-debt alternative may be the best decision at the concept stage.

After doing market research, analysing the competition, developing financial predictions, and outlining a strategy for generating enough income to repay the loan, debt financing may make sense.

How to fund your business idea

There is a wide variety of options available for financing a company venture.

Bootstrap

If you want to start a company but don't want to give up control or equity, bootstrapping is the way to go. It requires you to make use of your own means. This might necessitate using money from your savings or getting a loan against your property.

You can self-finance your company in many different ways. If you have regular part-time or full-time employment, you may like to keep it for as long as possible for the sake of your financial stability.

Although this is the ultimate objective for many would-be company owners, over-investing without solid financial backing or proof-of-concept can be a recipe for disaster. Generally, the younger you are, the more risks you can take — but this one is for you to figure out for yourself. 

Looking to become a better entrepreneur? These are some of the best business books for entrepreneurs

Pros

✅ Bootstrapping allows a sole proprietor to maintain complete ownership of his or her company. If you go through numerous rounds of funding, your part of the stock will be constantly diluted, even if you have a co-founder or two.

✅ If maintaining a say in strategic matters and day-to-day operations is important to you, bootstrapping is the way to go.

Cons

Time is always a significant challenge to overcome while bootstrapping a firm. It's common to have to retain your regular employment while still devoting time to your passion project. Especially if you have other commitments in your life, this leaves you with very little free time.

When starting a business without outside investment, you have far more to gain from its success and much less to lose if things go wrong. A lot of business owners eventually quit their day jobs to focus on their ventures full-time, which is riskier if your firm isn't making enough money to support you.

Loved ones and personal contacts

One traditional method of getting a company off the ground is to borrow money from loved ones. It may be more challenging to persuade sceptics like banks or investors, but you can usually count on the support of loved ones who are invested in your success.

They could be more open to investing in your business. If you plan on borrowing money from friends or family, it's in everyone's best interest to get independent legal counsel.

Pros

✅ Faster finance with more favourable conditions is provided. This might be a fantastic investment opportunity for your loved ones, depending on the rate of return you provide.

✅ Similar to how a friend or relative may be more flexible with the loan's payback schedule than a bank or payday lender, they may also charge less interest on the loan.

Cons

❌ When commercial dealings go awry, they may affect personal relationships badly. Carefully consider the consequences of a company failure before moving forward.

❌ Since family loans are informal, they don't need the mountains of documentation that are standard with institutional loans like banks. As a consequence, there may be misunderstandings concerning the agreement's terms and conditions.

Grants

Everyone benefits from a vibrant and forward-thinking society, which is why many corporations and business-focused groups provide scholarships and prizes to promising startups. There are a plethora of grants available, but each has its own set of requirements. 

There are grants that are only available to firms operating in certain regions, others that are only open to businesses operating in certain industries, and yet others that need your company to be doing ground-breaking R&D in order to qualify.

Depending on the kind of grant, you may get a flat amount upon acceptance, instalments paid over time, be required to make an upfront payment and subsequently receive reimbursement, or be required to provide matching funds.

If you apply for a grant of £10,000, for instance, you will need to raise an additional £10,000. This is what is meant by “matched funding”.

Pros

✅ One major perk of applying for a business grant is that the money is basically free. The fact that grants don't have to be paid back makes them a desirable source of funding for businesses.

✅ There is a wealth of data about when, when, how, and who to apply for grants. You'll need to look around to discover the perfect grant for you, so having easy access to that information is crucial. A smart place to start is the government's website dedicated to helping businesses get funding.

Cons

❌ If you want a grant, you'll have to put in a lot of time researching and filling out paperwork. You'll need to do some research to figure out which one is best suited to your particular endeavour, but there are a lot to choose from.

❌ Although grants are essentially free money, they do come with a number of strings attached. When applying for a grant, you should be as detailed as possible about how you intend to use the money.

Crowdfunding

Use the internet's clout to get the money you need if you're set on seeing a concept through. Sites like GoFundMe and Kickstarter, which facilitate online fundraising from a large number of individuals, have seen explosive growth in popularity in recent years. 

They're simple to organise, and if you write a compelling fundraising description, you can get contributions from individuals all around the globe.

Crowdfunding also allows you to borrow money from people you know, such as relatives and friends. Getting donations from people you already know is usually the most reliable option. They will be more receptive to your suggestion, and they will also have seen your work and commitment.

With this strategy, you solicit the necessary funds from members of the public online. Peer-to-peer financing is one option, as is selling shares or stock in your company to the public.

Those with a patient disposition and a company that has the potential for rapid expansion should go this route.

Pros

✅ If your crowdfunding campaign fails, the worst thing that will happen to your business is that you lose the money you spent on putting it up. The campaign's success may have a significant impact on the company's bottom line.

✅ Marketing and PR teams for new businesses are often small. A crowdfunding campaign may increase awareness of your business, which in turn can attract new consumers and investors.

Cons

❌ Most crowdfunding efforts fall short of their target amounts. Not having a sound crowdfunding business strategy and badly timed campaigns are two of the main reasons why so few of them succeed.

❌ Crowdfunding campaigns need much planning in order to be effective. Developing a product prototype is often necessary. Things like films, ads, explanations, donation levels, and awards need to be deliberated over and created.

Investors in new ventures

Typically, well-established businesses that are ready to take the next step but lack the funds to do so are the recipients of venture capital investments. ‘Unicorn' companies (startups with a value of $1 billion or more) are so exceptional that venture capital firms only sometimes participate in fundraising rounds for them.

They will analyse your company and business strategy and make an investment based on their estimation of your firm's potential for development. Venture capital companies may invest in a business in preparation for an initial public offering.

When making investments, venture capitalists often deal with very substantial sums of money.

Pros

✅ The goal of venture capital companies is to aggregate money from a variety of investors. In return, you stand to get access to substantial funding for your company, which may be difficult to acquire otherwise. 

✅ Traditional banks are notoriously risk-averse, so if your business concept doesn't excite them, good luck getting a loan from one. In contrast, venture investors are used to taking calculated risks and focusing on young businesses.

Cons

❌ Venture funders need a stake in your company, which might be a drawback. This is a hotly contested topic in the world of venture capital. At first glance, it may not seem so awful, especially considering how valuable networks and mentorship can be to new businesses.

❌ VCs want to make sure your business is going to succeed so they can get a good return on their money. They have put up their own money without any assurance of a return. As a result, there is sometimes pressure on new businesses to expand rapidly so that they may go public or be bought.

Accelerator and incubator programmes

Startups may benefit greatly from the services offered by business incubators, which are designed to help them gain traction. There is more to an incubator's value for firms than simply money. Additionally, they provide training in areas such as mentoring, networking, and business development.

These locations serve as both shared offices and training hubs for mentees. Startups will benefit greatly from working with such extraordinary individuals.

Pros

✅ Startups may reduce costs with the support of business incubators and accelerators. This is because many of these initiatives provide participants with free or low-cost use of facilities like conference rooms and office space.

✅ When starting a business, it might be helpful to have access to a network of other people in a similar position.

Cons

❌ Business accelerators and incubators have the potential to be very competitive. Not all businesses that apply will be admitted into the programme, and the application process may be time-consuming and challenging.

❌ These courses tend to be pricey, putting them out of reach for some would-be business owners.

Conclusion: Consider starting with a business plan

‘Failing to plan is planning to fail' is a true adage. No matter where you are in the lifecycle of your business, from just starting out to managing a thriving enterprise, creating a business plan will serve as a guide to getting you where you want to go.

Here are four primary factors in any business plan:

Market research: How large is the potential audience? 

Industry research: How has the market evolved, and what can we expect from it going forward? What kinds of tendencies in the market do you see?

Business research: Consider your company's primary strengths and weaknesses, as well as the threats and opportunities it is expected to encounter (a SWOT analysis), as part of your competitive study. Determine who your primary rivals are and investigate the markets in which your organisation might excel.

Customer research: Analysing your customers to determine who they are and how you can best serve them is called “customer analysis”. Which promotional methods would you use, and how much will you charge for your wares?

Related Guides:

FAQs

How should you pitch a business idea?

How can I pick the best idea?

Related Articles

10 Best Business Bank Accounts in the UK
10 Best Business Bank Accounts in the UK
As any small business owner knows, keeping your costs down is essential. There will...
Best Business Current Accounts
If you own a small company, whether it's just starting out or is well-established,...
Do You Need a Business Account?
If you’re a sole trader, or you own a limited business, you need to start thinking...
How to open a Revolut Business Account
When opening a business account, entrepreneurs are typically looking for three...