The startup financing journey: How funding needs evolve as your business grows

Every business has a unique financial journey. From those first tentative steps into the market to confident strides towards growth, your funding needs will change. Understanding these shifts will be central to your success.

Here, we take a closer look at how your financing requirements evolve as your business grows, along with the options available at each stage of your adventure.

Bootstrapping and personal finance in the early stages

Most businesses start with a bit of bootstrapping, the DIY approach to business finance, where you use your own resources to get things off the ground. Indeed, 85% of start ups launched in the UK in the three years prior to 2023 relied on the founder's personal capital as the initial source of funding.

Bootstrapping has its advantages. You keep full control of your business and avoid taking on debt. But it also has its limits. Unless you're sitting on a hefty nest egg, bootstrapping alone probably won't be enough to fuel significant growth.

At this stage, many entrepreneurs also turn to friends and family for support. It's often easier to convince someone close to you to lend a few grand than it is to persuade a bank. Just remember to keep things professional. Write up proper agreements and stick to them. You don't want Christmas dinner to turn awkward because you're behind on repayments.

Angel investors and seed funding for when you're taking flight

Once you've got a bit of traction-maybe a prototype or some early sales-you might be ready for your first external investment. This is where angel investors often come in.

Angel investors are typically wealthy individuals who invest their own money in early-stage start ups. They're often entrepreneurs themselves and can bring valuable experience and connections along with their cash.

Securing angel investment isn't just about the money. It's a vote of confidence in your business. It shows that someone with experience believes in what you're doing. This can be a real boost, both practically and psychologically.

At this stage, you might also look into seed funding from early-stage venture capital firms or even crowdfunding. The amounts raised here are typically in the tens or hundreds of thousands of pounds.

Venture capital and Series A when you want to scale

As your business starts to scale, you'll likely need more substantial funding, and it might just come in the form of venture capital (VC).

VC firms invest larger sums-often millions of pounds- in exchange for equity in your company. They're looking for businesses with high growth potential that could deliver a significant return on their investment.

If you get VC funding, then it's often a big milestone and can provide the resources you need to scale at pace, whether it's hiring key staff, investing in marketing or expanding into new markets. But it also comes with high expectations. VCs will want to see quick growth and a clear path to profitability.

Taking VC money means giving up a portion of your company too. You'll likely have to accept some loss of control, with investors often wanting a seat on your board. It's a trade-off: more resources to grow, but less autonomy in how you run things.

Bank loans and alternative finance when hitting your stride

As your business matures and starts to show consistent revenue, you might find traditional loans becoming more accessible. Banks typically want to see a track record of profitability before they'll lend, which is why they're often not an option for very early-stage start ups. If you've been going over 12 months, however, you'll appeal to more lenders.

Business loans can be a good option when you need capital for specific purposes, like purchasing equipment or expanding your premises. Funding Circle typically lends between £10,000 and £500,000 with repayment terms up to 6 years.

At this stage, you might also explore other finance options like lines of credit. For example, FlexiPay from Funding Circle, offers up to £250,000 of flexible credit, with no interest rates - just a flat fee per transaction - and the ability to spread repayments over 1, 3, 6, 9 or 12 months.

It's helpful for paying various business costs such as VAT and tax bills, bulk stock purchases, supplier payments or unexpected invoices. You can use it to seize sudden opportunities, cover business trip expenses or even manage payroll if needed.

IPOs and beyond in the big leagues

For a small number of high-growth start ups, the financing journey might culminate in an Initial Public Offering (IPO). This is when a company first sells shares to the public, becoming a publicly-traded company.

An IPO can raise substantial amounts of capital and provide an exit opportunity for early investors. But it also comes with increased scrutiny and regulatory requirements. It's not the right path for every business, and it's typically only an option for companies that have achieved significant scale.

Choosing the right financing at the right time

So, how do you know which type of financing is right for your business at any given time? Here are a few factors to consider:

• Stage of business: Very early-stage start ups typically rely more on equity financing (angel investors, VCs) while ones that are a year or older can access debt financing (loans).
• Amount needed: The amount you need will influence your options. Smaller amounts might be covered by personal finances or angel investors, while larger sums typically require VC or significant loans.
• Purpose of funding: Are you funding day-to-day operations or making a specific investment in growth? This can influence whether you need a lump sum (like a term loan) or more flexible financing (like a revolving credit facility).
• Growth trajectory: High-growth start ups aiming for rapid scaling often lean towards equity financing, while steadier businesses might prefer the predictability of loans.
• Willingness to dilute ownership: Equity financing means giving up a portion of your company. Are you comfortable with this? If not, debt financing might be preferable.
• Repayment ability: Can you commit to regular loan repayments? If your cash flow is unpredictable, equity financing or more flexible credit options might be better.

Most businesses use a mix of financing types as they grow. You might start with personal savings, graduate to an angel investment while also taking advantage of business loans and business credit cards.

The goal is to stay informed about your options and to think strategically about long-term financing requirements. Don't just look at what you need now-consider what you might need in six months, a year, or five years.

And don't be afraid to seek advice. Financial advisors, experienced entrepreneurs and even potential investors can offer valuable insights into the best financing strategies for your business.

FInding the right financing at the right time

Your financing journey is unique to your business. Having a clear picture of the options available and choosing wisely means you can give your business the fuel it needs to grow and thrive at every stage of its development.

Learn more about financing for start ups and potential solutions from Funding Circle.

08/10/24: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.

Public link

Please use the above public link if you want to share this noodl on another website.