Raising finance for a new company: realistic options and their real cost

Map the realistic options before approaching anyone

Start by estimating exactly how much funding is needed and for what: working capital, equipment, premises fit-out, stock or a cash runway while building revenue. A vague ask for "investment" is harder to raise than a specific, costed plan that shows how the money will be used and repaid or returned.

Most new companies combine more than one source: founder savings or a director loan to get started, perhaps a Start Up Loan or overdraft for early working capital, and equity or grants only once there is a credible plan or track record to support them.

Understand director loans into the company

A director can lend personal money to their own company, recorded through the company’s accounts as a loan from the director, distinct from share capital. This is often the simplest and cheapest way to get a company started, since the company can repay the loan to the director free of tax when funds allow, provided it is genuinely a loan and properly recorded.

Keep clear records: minute the decision, record the amount and date, and decide whether interest is charged (which would be taxable income for the director and a deductible expense for the company, subject to the usual rules). Do not confuse a director loan into the company with the reverse situation, a director borrowing from the company, which has separate tax consequences including the overdrawn director’s loan account rules.

• Record the loan in company minutes and in the company’s accounting records.
• Decide and document whether the loan carries interest.
• Keep the director loan account separate from share capital and dividends.
• Repay the loan through the company bank account, with a clear paper trail.

Check the Start Up Loans scheme in detail

The government-backed Start Up Loans scheme offers unsecured personal loans, from £500 up to £25,000, to individuals starting or growing a UK business that has been trading for under five years. Because it is a personal loan rather than a business loan, the applicant undergoes a personal credit check, and the loan is the individual’s personal liability, even though the funds are generally used in the business.

Always check the current fixed interest rate and terms on GOV.UK before applying, since they can change; funding typically includes free business plan support and a period of free mentoring for successful applicants. Multiple partners in the same business can each apply individually up to the per-person limit, subject to an overall cap on how much a single business can receive this way.

Worth knowing: This is a personal loan to the individual, not the company; the applicant remains personally liable for repayment regardless of how the business performs.

Use overdrafts and short-term credit carefully

A business overdraft or revolving credit facility can smooth cash flow timing gaps, such as waiting for customer payments while supplier invoices fall due, but it is generally a relatively expensive and flexible form of short-term borrowing rather than a source of long-term capital. Lenders commonly ask for a personal guarantee from a director of a new company with limited trading history.

Compare the headline interest rate with any arrangement fee, minimum balance requirement, and whether the facility can be withdrawn or reduced by the lender at short notice. Relying on an overdraft as a company’s main source of working capital is risky, since availability and terms can change without much warning.

1. 1

   Calculate exactly how much short-term working capital headroom is needed and why.

2. 2

   Compare overdraft, credit card and short-term loan options on total cost, not just the headline rate.

3. 3

   Check whether a personal guarantee is required and understand the exposure.

4. 4

   Confirm the lender’s right to withdraw or reduce the facility and plan for that risk.

5. 5

   Keep a cash flow forecast updated so you are not relying on a facility reactively.

Weigh up equity investment and what it costs long term

Raising equity means selling shares in the company in exchange for cash, which does not need to be repaid like a loan, but permanently gives up a proportion of ownership, future profit and often some degree of control through shareholder rights and board representation. It is usually suited to businesses with a credible plan for significant growth that can justify an investor’s expected return.

Before approaching investors, prepare a clear business plan, realistic financial projections, and understand the share structure and valuation you are proposing. Get legal advice on a shareholders’ agreement and check whether schemes such as the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS) are relevant, since investor tax reliefs can materially affect appetite to invest, but have strict eligibility conditions.

Treat grants as conditional funding, not free cash

Grants are typically offered by government bodies, local authorities, or sector-specific schemes for particular activities, such as research and development, exporting, or regional investment. Grants rarely cover a project’s full cost; many require match funding from the business itself, and payment is often made in arrears against defined milestones or evidenced spend, not upfront.

Read the eligibility criteria and reporting obligations carefully before planning around a grant that has not yet been approved. A grant application can also take considerably longer to process than a loan or overdraft application, so timing matters if cash is needed urgently.

• Check whether match funding is required and whether you can genuinely provide it.
• Confirm whether payment is upfront, in arrears, or against milestones.
• Read the reporting and compliance conditions before applying.
• Do not commit spending that depends on a grant that has not yet been formally approved.

Compare the real cost and risk across options before choosing

Interest rate alone does not capture the full cost of finance. A personal guarantee converts a company liability into personal exposure; equity gives up a share of future upside permanently; a grant may come with reporting burdens disproportionate to its value for a very small amount. Work out the total cost, the risk if the business underperforms, and what each option requires you personally to put at stake.

Consider getting independent advice from an accountant or a business support adviser before committing to larger or more complex finance, particularly anything involving a personal guarantee or giving away equity, since these decisions are hard to reverse once made.

Worked example: combining sources for an early-stage company

Illustrative scenario: a founder needs £15,000 to launch a small manufacturing business, covering equipment, initial stock and three months of working capital. They contribute £5,000 as a director loan, apply for a £10,000 Start Up Loan to cover the rest, and set up a modest overdraft facility as a buffer rather than a primary funding source.

They decide against seeking equity investment at this stage, judging the business is not yet at a scale that justifies giving up ownership, and instead plan to revisit equity or further borrowing once there is a trading track record to show potential investors or lenders.

Common questions

Official sources & further reading

This guide draws on the official guidance below. Rules, fees and individual circumstances can change; check the relevant source before acting.

• GOV.UK: Apply for a Start Up Loan for your business
• GOV.UK: Finance and support for your business
• GOV.UK: Seed Enterprise Investment Scheme and Enterprise Investment Scheme

General UK information, primarily for private companies limited by shares. This is not personalised legal, tax or financial advice. An accountant or solicitor can help apply the rules to your situation.