6 types of business funding for UK tech companies
By Lucy Wayment on Small Business UK - Advice and Ideas for UK Small Businesses and SMEs Here we explore six types of business funding that can help your UK tech company expand and reach its goals The post 6 types of business funding for UK tech companies appeared first on Small Business UK.
By Lucy Wayment on Small Business UK - Advice and Ideas for UK Small Businesses and SMEs
After years of explosive growth, things have changed for the UK tech sector. UK technology investment dropped by more than 20% in 2022, with nearly 80% of all founders saying it’s now harder to raise funds, according to Atomico’s State of European Tech report.
But it’s not all doom and gloom. And there’s still plenty of ways you can get tech company funding, whether you’re just starting up, have been trading for years or need something short-term to deal with a cash flow gap. As always, your options hinge on two key choices: give up a stake in your business or borrow something that you’ll have to pay back.
1. Friends and family funding
Many businesses get started by cobbling together cash any way they can, from life savings to remortgaging a home. Sometimes entrepreneurs get money from people they know, like friends, relatives and others they’ve met along the way. Tech companies are no different: Jeff Bezos convinced his parents to become early investors in Amazon, while Steve Jobs sold his Volkswagen to raise the money for the first Apple computer.
When you’re getting funding to start your tech business, one reason you might turn to friends and family is that banks may be more hesitant to lend to you, especially if you have no financial track-record. With people you know, things are more informal and they may be willing to back something others deem too risky.
How does it work?
It all depends on who you know. Maybe you have an uncle trusting enough to lend to you on an interest-free basis, with relaxed repayment terms. Perhaps you have a wealthy school friend willing to make you a generous one-time gift. Maybe you know someone else up for lending you money, as long as it’s over a specific time period or in exchange for equity.
Either way, friends and family funding isn’t risk-free. Things get complicated if people are expecting a return you can’t deliver, particularly if they aren’t able to cope with that level of financial loss. So make sure you only accept money from people who can afford it, or those you’re willing to give away control to.
2. Government-backed funding
If you’re a tech company seeking funding, it’s worth considering the government’s Start Up Loans scheme. The programme has provided more than £800 million worth of loans for over 90,000 business ideas, covering a range of sectors.
Unlike business loans, the scheme offers unsecured personal loans from £500 to £25,000, with a fixed rate of 6% interest. What’s more, you can repay the loan over a period of up to five years and there’s no application fee or early repayment fee. There’s also scope to apply for a second loan.
How does it work?
First, check if you’re eligible by filling out some key details. After that you’ll need to complete an application form, which focuses on your financial situation and what you’d use the money for. If you pass a credit check, you’ll be asked for a business plan, cash flow forecast and personal survival budget.
After that, a dedicated business adviser will review your documents and help you get ready for assessment, the last stage of the process. If you’re successful, you can get a year of free post-loan mentoring and support too.
3. Equity funding
Equity funding is all about selling shares in exchange for investment in your business. It’s a common approach for entrepreneurs getting funding to start their tech business, who often turn to venture capital firms or angel investors.
If you aren’t familiar with venture capital (VC) firms, they tend to focus on early-stage businesses. VC firms sometimes inject millions of pounds as part of series A funding into the tech companies they have interests in, as well as multiple rounds of funding after that. They often take a minority stake, either 50% ownership or less, which means you’ll potentially give away a lot of control.
Angels do something similar, but usually invest less. They’ll offer advice and input too, but in a more hands-on way. After all, they’re investing their own money and have probably been successful entrepreneurs themselves.
How does it work?
First off, you’ll need to be sure you’re even relevant, so get to grips with your financials, how much you’re after and whether your business is at a stage VCs or angels will even consider. That means early stage, pre-revenue or pre-profit.
You can find angels through directories like the UK Angel Investment Network and the UK Business Angels Association (UKBAA), but it’s worth doing lots of research. With VCs, it’s a similar game: loads of research, including attending events and examining the portfolio companies of the VCs that pique your interest. Most of all, you’ll need a stellar pitch.
4. Invoice finance
Cash flow problems are one of the biggest issues tech companies face. Depending on how you make money, your income can be lumpy, as sales fluctuate and clients take time to pay. Meanwhile your outgoings stay the same, whether it’s rent, payroll or the money you need to pay suppliers.
When it comes to overdue invoices, chasing helps – and you can always call in the debt collectors, if it gets to that. But however you deal with late payments, things tend to drag on, sometimes taking months. With invoice finance, you can unlock up to 95% of the money you’re owed, sometimes within 48 hours.
How does it work?
Let’s say you run an online wholesale business and it’s coming up to Christmas, when you’re expecting lots of big orders. You’ll need to pay for extra stock and maybe even hire more staff, to ensure you can meet demand.
The problem is you’re owed £7,000. If you agree to an invoice finance deal which gets you 90% of that invoice up-front, with total fees and charges at 3%, you could get an advance of £6300. When your customer pays, you’ll get the remaining value of the invoice (£700) minus fees (£210), so you receive £490.
5. Working capital loans
You might take out a working capital loan for similar reasons to invoice finance, in that it can help you fund day-to-day operations. When it comes to tech company funding, working capital finance is particularly suited to seasonal businesses.
With a working capital loan, you could plug a gap and ensure your bills and other expenses still get paid. This type of funding is for the short-term and you’d pay it back within a year, so you wouldn’t use it to invest in equipment or property.
How does it work?
Let’s say you sell software to accountants, who are traditionally extremely busy during self-assessment tax return season. When they’re unreachable, your prospects are far less likely to buy. But you still need money coming in for your other commitments.
With a working capital loan, you could tide your business through that cash flow gap. As with most funding, the amount you can borrow depends on your credit score, how much you’re turning over and how long you’ve been in business, along with your industry and whether you have assets to secure the loan against.
6. Traditional business loans
The term “business loan” is a broad one and it includes some of the options we’ve listed above. Here we’re talking about loans that aren’t tied to your invoices or for working capital, which you might use to expand, by upgrading your offices, buying property or launching a new service line.
You could finance these activities with an unsecured business loan, which can be more straightforward. There’s also secured loans, where you might put down property or equipment as security. With secured finance, you can take advantage of fixed interest rates and early repayment; lenders might look more kindly on your credit score too.
How does it work?
Like other funding, lenders want evidence that you can pay them back, which they can get by reviewing your accounts, for instance. The other classic stuff applies too: some lenders will only consider your business if you’ve been trading for a specific number of years, or if you’re in a creditworthy sector.
While the money out there for UK tech companies has been squeezed lately, that doesn’t mean there aren’t good options. A lot of it comes down to your goals and proving that you’ll achieve them. With VCs and angels tightening their belts, debt finance has become increasingly attractive for tech companies seeking funding, but it can be a tricky space to navigate.
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