How to Fund your New Product Idea
To provide a starting point we have pulled together some of the common funding options in the UK.
Bootstrapping or self-funding is a term that means starting a business without seeking outside investment or venture capital. Like with most funding routes, there are pros and cons to this approach. It has been found in various studies that 80% of startups choose to build their business through bootstrapping.
Bootstrapping allows the founder to retain all the equity in the business. Plus, it means you have no external influences on decision making and the direction of the business. Another benefit is the business is more attractive to future investors.
On the flip side organic growth is often slower, without injections of funding to invest. As well as funding investors can often bring a wealth of valuable advice, so without this founders sometimes find they lack support. But certainly, one of the biggest challenges facing self-funded startups is limited time and a higher level of personal risk.
Bootstrapping doesn’t necessarily mean you need huge amounts of savings. Often people start their new business whilst still working a day job, in spare time. Another way to bootstrap your startup could be to apply for a start-up loan. These are government backed in the UK. Unlike a business loan these are unsecured personal loans, offering between £500 - £25,000 per founder with a fixed interest rate that can be paid back over 1 to 5 years.
For some people, reaching out to friends or family could be a reliable way of raising funds. Having the ability to quickly access funds allows you to focus all your efforts on the new venture. The terms of the borrowing can be agreed between yourselves and are often more favourable than other sources. Friends and family are in a unique position to understand your aspirations and ambitions, giving them the confidence to invest or provide funding.
Caution should be exercised when looking to friends and family for support. You should consider what the consequences of your business failing would have on your relationship. Friends and family should only lend or invest money they can afford to lose.
Worldwide crowdfunding raised around £24 billion in 2020 from 6,445,080 campaigns hosted according to data shared by [fundly.com][1]. This is a rapidly expanding market which is expected to triple by 2025.
Crowdfunding is a where a new product or venture is funded by many people investing small amounts of money to raise the investment needed. Its growing popularity has led to multiple platforms all offering different models of investment.
One of crowdfunding’s unique benefits is the ability to raise money whilst simultaneously marketing your new product and potentially capturing a base of customers that fall within your target market. Crowdfunding can be categorized into two areas: Reward based crowdfunding and Equity based crowdfunding.
Kickstarter and Indiegogo are well established crowdfunding platforms perfectly suited to generating funds for your product-based business venture. They allow you to secure guaranteed sales before huge capital spends to manufacture your product. The biggest benefit of a successful campaign is that your backers receive rewards in place of shares. There is, however, no guarantee of success and your campaign will need a well-planned marketing and reward strategy.
Seedrs and Crowdcube provide platforms for businesses that are not product based to offer equity in return for investment. Investment can start at as low as £10 for UK businesses looking to raise at least £10,000 and above. These platforms allow access to the general public to invest in emerging and innovation startups, along with improved access for private investors.
Government backed grants are available to UK registered organisations to develop game-changing innovation. Innovate UK, which is part of UK Research and Innovation (UKRI), provide grant funding, loans or procurements to support innovative ideas and business growth.
There are other grants available to UK based startups, such as, The Prince’s Trust for people aged 18 -30 years and other more specialised and localised business grants from Scottish Enterprise, The National Lottery Heritage Fund, etc.
Another source of funding is Peer-to-Peer (P2P) lending. This is often seen as an alternative to borrowing from a large bank. Banks are risk-averse and typically don’t loan to start up businesses that are unproven. This type of borrowing poses a higher risk to the lender but is generally countered with a higher rate of interest to the borrower.
Funding Circle, Zopa and Ratesetter all offer Peer-to-Peer loans to qualifying businesses, all offering unsecured loans up to a value of £500,000. The marketplace is competitive with varying loan rates, loan amounts, eligibility criteria and tenures. Shop around to see which website’s offer best suits your business.