How to fund your business idea

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Have an idea for a business but need to raise finance to make it happen? There are more ways to fund a new startup than ever before. On top of the traditional avenues such as a bank loan, there is now equity or reward-based crowdfunding and government-backed Start Up Loans. This blog is an introduction to the alternative ways of funding your business idea.

A Start Up Loan through Virgin StartUp

If you’re looking for funding ranging from £500 – £25,000 to launch or grow a business in England or Scotland, then a Start Up Loan through Virgin StartUp could be for you.

This option allows you to keep 100% equity in your business. Whether or not you get the funding depends on the strength of your business idea, not on your credit rating. You are also matched with a mentor who commits to 15 hours of face-to-face support over 12 months.

Who is it good for? This type of funding is for businesses that are at the ideas stage. It’s also ideal for ideas that have been trading for up to two years. Finally, it’s perfect for those who have been running a business on a very small scale and are now ready to take it the next level. You can apply for funding here.

Reward-based crowdfunding

This is crowdfunding where people pledge money in return for rewards. It can be anything from a shoutout on social media, early access to the product or service you’re offering, or tickets to a party once the business launches. You don’t give away equity in the business but you have to honour all of the pledges you receive. So, if you set a target of £5,000 and you hit it through pledges, you will have to use that money to meet all of the pledges. If you do not meet your goal, then the people who have pledged get their money back. You will not have to honour the rewards. This form of crowdfunding can be a great way of validating an idea as it proves whether or not people will buy your product.

Who is it good for? Rewards based crowdfunding is ideal for new projects that are yet to get off the ground. This is because it doesn’t depend on convincing investors. It just depends on having a great idea that a lot of people can get behind. If you don’t have a track record, it’s an ideal way to go about getting one, proving demand for your product.

Equity-based crowdfunding

Equity-based crowdfunding involves multiple people investing in the business and receiving equity in the business in return. For example, you might put up 10% of the business in return for raising £100,000, with individual investors taking very small percentages – a 1% stake in the business would set an investor back £10,000, a 0.1% stake would be £1,000, and a 0.01% stake £100.

The benefits of equity-based crowdfunding include no pressure to manufacture ‘rewards’. It’s all about the future of the business. Not to mention the potential to gain larger sums of money than with reward-based crowdfunding. However, as with anything that gives away equity, you’re relinquishing some stake in the business.

Who is it good for? Businesses that are already established and looking to expand. Or businesses whose product would be difficult to leverage as a reward.

Find out more information from Xero’s collaboration with Virgin StartUp in this guide to financial management.

Find out how Dan Weaver and James Hill turned a business dream into reality with the help of a Virgin StartUp loan. Watch their story here.

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