Sources of finance for new businesses

Question

What are some of the available sources of finance for new businesses?

Answer

There are a variety of sources of finance available to new start-ups. The most popular sources of finance are:

Personal resources: This includes any personal savings that you may have accumulated over the time of your life. Typically, these will be used at the very beginning of the set up of a new business.

Family and friends: Sometimes your family and friends may be willing to offer you financial assistance by contributing capital to the start-up of a new business. Typically, this will occur at the very beginning of the set up of a new business.

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Angel investors: Angel investors are high net-worth individuals, who have a net-worth of at least £1 million. Angel investors are individual investors who invest moderate sums (typically between £25,000 to £100,000) of their own personal money into a business in return for a share of the equity of the business. Angel investors typically assist a company in early stages of development, such as technological development. Typically, angel investors will assist a business until it is in need of a ‘Series A’ investment, which is an investment typically made by venture capitalists.

Venture Capital: Venture Capitalists are typically formed as Limited Partnerships in which the Limited Partners invest in the Venture Capital fund. The fund is then used to provide capital for a business in return for a share of the private equity of the business. Venture capitalists typically invest large sums of capital (£1million plus) and the capital is typically provided to a firm which has already demonstrated success but needs more capital to grow rapidly and develop markets rapidly. Venture capitalists typically assist a company until it is ready to go public on a stock exchange or be acquired by another company.

Loans: Loans are provided by banks. The bank will provide a specified amount of capital and in return for this capital you will have to pay the bank back the money as well as interest. The bank will set out what the rate of interest is for the loan and how much time you will be allowed to pay the bank loan back in.

Grants: A grant is capital that is provided to the business, typically by a government but sometimes by another organisation such as a university. You do not have to pay grants back, but the entity providing the grant will often place stipulations on how the capital from the grant can be spent.

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