Funding for UK Tech startups can be challenging, especially during the initial stages when you don’t understand your business finances. However, if tech startups are innovative and create value in the marketplace, chances of finding investors or government grants in the UK become easy.
There are multiple ways to boost business finances, like R&D tax credits, Innovative UK grants, New Enterprise Allowances, and more. On the other hand, you can apply for startup loans from banks, angel investors, debt financing companies, Capital Venture Trusts, and more.
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With this vast number of loan and grant options, you can set up a successful tech startup.
This blogpost shares the need for funding for tech startups and the top 6 types of startup funding available in the UK.
Table of content
- Why do tech startups need funding?
- What are the types of startup funding available in the UK?
- Final thoughts!
Why do tech startups need funding?
Running a business requires a smooth cash flow, which usually remains disrupted during the initial years. Therefore, most startups look for funds from government grants, private loans or equity financing.
You can use these to enter new markets, develop a new product, purchase business equipment and hire people, market your business, or grow your startup.
What are the types of startup funding available in the UK?
There are multiple types of startup funding available for tech businesses in the UK that you can try. We have the top 6 funding options below for your understanding.
1. Government Startup loans
These are the best type of funding that you can opt for your tech startup. The UK government offers a range of schemes, startup loan options, and tax credits to motivate tech entrepreneurs to focus on making innovative projects. Some of these are available at lower interest rates, while tax credits allow you to claim a part of your spending on R&D on your tax return.
We have listed some of these grants and government-backed schemes for your startup financing.
| Funding options | Eligibility |
| Government-backed startup loan | ⦁ Available for all businesses with a good credit score, and business must be fully trading within 36 months of loan application. ⦁ Get an unsecured loan of £500 to £25,000 @ 6% interest per year over 1 to 5 years repayment period. |
| R&D tax credits | ⦁ Available for companies at the ideation stage of R&D (Research and Development). |
| Innovative UK Grants | ⦁ Available for companies at the ideation stage of R&D (Research and Development). |
| Innovative UK loans | ⦁ Available for companies at their commercialisation stage of innovation and having less than 250 employees. ⦁ Loan amount is available between £100,000 and £1 million @7.4% interest over 5-10 years of repayment time. |
| Seed Enterprise Investment Scheme (SEIS) | ⦁ Business needs to check if they are eligible for SEIS. ⦁ Receive up to £250,000 investment. |
| Enterprise Investment Scheme (EIS) | ⦁ Businesses need to fulfil a few criteria to be eligible for EIS. ⦁ Receive investment between £5 million per year to £12 million in your company’s lifetime. |
2. Startup business loans
Funds are essential for a startup to keep running your business smoothly. However, in the initial years, you might not have sufficient cash flow when looking for different business loans.
Initially, you can do bootstrapping (self-funding), where you put some of your savings into your business. Otherwise, look for funding from your friends and family or business associates as debts.
Finally, you can start asking banks and financial institutions for business loans. They can be secured or unsecured loans. A secure loan asks for a part of your equity against the loan amount. If you cannot repay them in time, banks take away your equity share in business.
Unsecured loans are safe as they don’t ask for equity, but it is not available for all, especially someone with a bad credit score. These loans are usually available at higher interest rates. Therefore, you must consider them before applying for a loan.
3. Crowdfunding
You can raise capital from several individuals through online platforms to fund any tech project or business venture. This is known as crowdfunding, and you can do it in mainly two ways: rewards-based crowdfunding and equity crowdfunding.
In rewards-based crowdfunding, you can offer the investors non-financial incentives against the money they invest in your company. For example, you can give them free products or services.
For the other one, you can find investors from different crowdfunding platforms who will offer you money in exchange for a small part of your company shares. Equity-based crowdfunding not only helps you with money but can guide you through business growth and expansion.
4. Venture capital funds
High-potential tech startups in the UK can apply for financing from venture capital firms. They provide private equity financing where you get investment in exchange for equity in your company.
The main difference between equity crowdfunding and venture capital funding is the amount of shares you sell in exchange for investment. VCs usually take a larger part of your company shares than equity crowdfunding investors. But, these investors usually have higher expectations of getting better returns from your company in the long run, so they also provide you with valuable guidance.
While searching for VC funds, you must look for investors who work in your domain or have a special interest in collaborating with your industry. However, you must have a good pitching ability and knowledge of your business finances, valuations, and equity ownership to close deals with investors.
5. Invoice financing
One great way of getting capital faster is through invoice financing. You need to provide all your due invoices from customers to an authority. They will cross-check the invoices and provide you with a loan of the same amount. You can use the customer’s receipts to repay the loan. However, before agreeing, you must check their fees, facilities, and flexibility.
You can also try an invoice factoring method to get finance from a financial institute. Unlike invoice financing, you can sell your invoice to the company and get similar funding (equal to your dues) from them. The company then takes over the responsibility of collecting receivables from your customers. They offer you the excess amount if this exceeds your loan plus their service charge.
6. Angel investors
These high-net-worth individuals are ready to invest in your company in exchange for its shares. However, they differ from venture capitalists as they usually put money from personal funds and not from a larger pool of capital.
One major advantage of asking angel investors for help is they are experienced entrepreneurs and industry professionals. Such investors put not only money into your business but also effort and time into making your business grow and expand.
However, while you are choosing angel investors, make sure you have a clear communication of business goals. This ensures you don’t get into conflicts and lose your company’s shares.
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Final thoughts!
Now, you must have a clear idea about all the startup funding options available, along with their pros and cons. If you aren’t sure which one to choose, ask an accountant or a finance manager.
They will help you make a data-driven decision by considering your business and personal financial health and other factors.