As of 1st Jan 2022, the New Enterprise Allowance will be no more and, at the time of writing, the government doesn’t have a replacement. So, the question is – if you are thinking about starting a new business, how can you fund it?
We answer the common questions surrounding start-up funding, especially on a small scale, and give you some ideas as to where you can get help.
What was the New Enterprise Allowance?
The New Enterprise Allowance was a grant of up to £1,274 for small business owners, over a period of 26 weeks. The scheme also gave new owners access to mentors who would help them navigate the choppy waters of launching and running a start-up, along with the opportunity to apply for an additional loan to help with costs.
It was not possible to apply for an NEA directly. Instead, prospective and new owners were referred by a job coach if they were suitable for the programme. The aim was to support people out of unemployment, and into self-employment.
The scheme was only available to people who were 18 or over at the time of application, and in receipt of Universal Credit, Jobseeker’s Allowance, or Employment and Support Allowance.
Types of funding for new businesses
The demise of the NEA means there is a funding gap for many people wishing to start their own business, but who don’t immediately have the capital. Fortunately, there are a variety of ways that you can bring money into a business. They often fall into three broad categories:
Grants for start-ups
A business grant is a sum of money which doesn’t need to be paid back, so there won’t be any interest to pay either.
The pros and cons of grant funding
Sound too good to be true? The upside is that this is free money. Some grants can be very large, and granting organisations will often have other types of help available too. For instance, free or reduced rental premises, business mentors, and other operational and development support.
One of the downsides is actually finding a business grant. They’re often only available for a specific reason or group, such as a targeted age group or location, or for a particular purpose. You may get a grant that can only be used to buy assets when what you really need is help paying the rent on your workshop.
The grant environment is almost as varied as businesses themselves, so if you don’t fit into a specific box it doesn’t mean that you won’t find funding elsewhere.
Applying for a business grant
Because of the nature of grant funding, the application process can be quite long-winded. Be prepared to fill out lots of forms. The good news is that setting the money aside for use as funding is a pretty good indication that they want to help.
There is usually support available to help you access grant funding. Don’t be afraid to ask for help!
You’ll normally need to explain (in detail) what your business is, or will be, and what you plan to use the money for. You will almost certainly need to include a business plan!
A note on matched funding
Some grants are made on a ‘matched funding’ basis. This means they will put in £X for every £x you put in, so it’s useful to check the terms before spending time on the application.
Loans are an extremely common way for businesses to access money in order to develop, and for many people they are the ideal solution.
Many banks and loan companies are very responsive and quick to provide a decision, so it might not take long for the cash to hit your bank account. The amount you can borrow is, theoretically, unlimited – and usually the money can be used for any purpose as you see fit.
Most banks will expect you to provide a business plan (there it is again!) or at the very least, a financial forecast.
Business loans and your business structure
Small business loans can be a great way to get cash so you can start building your new business. After all, they work for millions of other businesses around the world.
Normally if you take out a business loan as a company, then the liability for repaying it is with the limited company. Take out a loan as a sole trader, and the liability stays with you.
The main problem for a new business is that you don’t have a track record, so actually getting the loan can be difficult. Businesses with little or no track record may need to sign a personal guarantee. This is a legal agreement to say that if the business doesn’t pay back the loan, you will be personally liable.
So, even if you operate as a limited company, you may still become liable depending on the terms of the loan. It is vital to make sure that you will be able to afford the monthly repayments on the loan, whether it is a business or personal version.
Borrowing money, but not from the bank
You could also take a loan from family or friends, but be cautious. Mixing business with family in this way might be a recipe for disaster and if the business goes bad, it can also turn your relationships sour.
If you absolutely must take a loan from someone close to you, then make sure you put it on a formal footing. Insist on a loan agreement in writing, and make sure they know the risks. Defaulting on a loan to a close friend or family member doesn’t bear thinking about.
In accounting terms, equity is the net worth of a business; the more equity there is, the more valuable the business. Owning shares in a company means that you own equity, and therefore a share of the profits.
Because of the nature of equity funding (selling shares in a business), it only applies to limited companies. Sole traders don’t have shares to sell!
When you make a profit, you’ll have to share it with your shareholders by paying dividends according to how many shares they own.
At the same time, if you don’t make a profit then there is nothing to pay, and that’s the risk that they take by investing.
It can also be a way to bring in money from professional or semi-professional investors. They want a return on their investment, so the money may come with an offer of help. Just remember that if you sell more than 51% of your business’ equity then it is no longer ‘your’ business!
You can take equity investment from family and friends but just as with loans, the same health warnings apply. Make sure they know what they are getting into and make sure you put it on a formal footing.
Your research into funding may include reference to Private Equity (PE) or Venture Capital (VC) funding. These are professional investment companies that provide funding for businesses. They often deliver a hybrid approach between taking equity in the business and providing loan capital.
Normally this only really suitable for companies that have very high growth potential and a substantial business model.
The important thing here is that PE and VCs are professionals and as such, just like a casino, they make sure the house is always ahead.
Crowdfunding your start-up
Crowdfunding sites like Seedrs and FundingCircle use the power of the crowd to offer funding for businesses at most stages of development.
Some, like FundingCircle, offer loan finance to businesses at reasonable rates of interest. This is suitable for companies that can’t get funding elsewhere, but it does require a full funding application.
Seedrs specialises in working with early-stage start-ups. Crowdfunding investors get together to buy a package of shares in the business, giving it the capital it needs to grow. Again, you will need a substantial business plan with full financials.
What is bootstrapping, and is it an option for start-ups?
Bootstrapping means the business funds itself using its own resources generated from operations. Early-stage start-ups will often use a bootstrapped approach to prove the concept of their business, only taking on different types of funding later on.
This does have its benefits. The business won’t take on debt early on, and you’re more likely to get loans at a better rate once you can prove that your business (and you running it!) works. You may be surprised at some of the companies that started out by bootstrapping their way to success, such as Dell Computers and eBay.
Bootstrapping works best when you have a clear plan to grow your business, and understand the good and bad points about growing in this way. Also called organic growth, bootstrapping tends to be slower than bringing in outside money, but it is much more reliable. Plus, you get to find out if your business idea works before you commit to hefty loans or equity sales.
Funding a new business isn’t always easy
The plain fact is that it is often difficult to get the capital you need to get your business idea off the ground, especially if it is an unusual or disruptive one.
Just because it is difficult, doesn’t mean it is impossible. Don’t give up!
There are plenty of sources and types of funding, so when one door closes, another opens.
Some further resources
Business grants are available from all sorts of different organisations
Check out your local BID or growth hub organisation. Even if they’re not offering grants themselves, they usually have a database of granting organisations as well as help and advice for new businesses.
Barclays runs its successful Eagle Labs scheme which provides help and funding for SMEs