British startups in their early stages have several financing options. Loans are always available, but it can be challenging to secure one without an extensive credit history. Equity is the next common option, but good investment can also be difficult to navigate and comes with caveats.
That being said, the UK has a robust ecosystem for startup financing and business financing overall. Business loans can be overlooked, but it’s possible to borrow startup capital without giving up shares.
The primary question is which trade-off is more worthwhile. In this quick guide, let’s look at how these options work.
The Case For Debt
British startups receive several benefits when they take on debt that they’re adequately able to pay off.
You Keep Your Equity
First, you need to consider equity preservation. Because we’re comparing debt and equity sacrifices, we have to note this first. Taking out a loan has some risks, but it allows you to maintain full control over your business.
In the long term, equity becomes very important. You can maintain a long-term vision and have your own exit strategy when you maintain it.
Tax Deductions
Debt will cost you, but you can partially recover those costs through tax deductions.
Interest payments on loans are tax-deductible in Britain. So, the net cost of borrowing can be lower than meets the eye.
Predictability
Compared with selling equity, taking on debt is predictable. From the start, all your costs and your repayment schedule are set in stone. You will know exactly how much you need to pay and when. You also understand the consequences of missing payments before you start.
With investors, you don’t have the luxury of predictability. Equity investors can make demands like a focus on rapid scaling, and they can influence your most crucial decisions. In many cases, their influence is good. But the course of your business activities will be less predictable with them than with a loan.
The Case For Equity
There are a few key advantages that equity investment can provide that loans cannot.
No Repayment
You don’t need to make set repayments. Equity capital is paid for in long-term control, but you don’t need to put cash down for it. In the earliest stages, this can make a big difference. Instead of worrying about debt, you can put all your available capital exactly where you need it.
Debt can redirect necessary reinvestments into your business into a lender’s hands. In some cases, this is what business owners are avoiding when they seek investors.
Strategic Support
Investors don’t just provide capital. Because they are buying a stake in your business’s future, they also have a vested interest in your success. Many investors bring a lot more experience to the table than inexperienced startup owners do. In many cases, this is a very beneficial arrangement.
Investors like angel investors and venture capitalists often offer a mix of:
- Mentorship
- Industry knowledge
- Managerial expertise
- Industry connections
- Reputational credibility
These benefits can open new doors for you that a loan could not.
Scalability Benefits
Equity financing enables you to scale faster. Once you’ve provided a robust, profitable model, you can raise more capital and not get dragged back by interest repayments.
The British Loan Economy For Startups
The British loan economy includes:
- Start-up loan schemes backed by the British Business Bank
- Traditional bank loans for businesses with strong credit histories and/or collateral
- Alternative lenders who offer faster capital with lower requirements, normally at a higher cost
- Innovate UK grants
How Do Other Countries Compare?
Let’s take a quick look at how foreign lending economies work in comparison to the British ecosystem.
Australia
The Australian government also offers some initiatives, such as the Entrepreneur’s Programme. However, few of them and few traditional loans focus on servicing startups. Many early-stage startups in Australia rely on bootstrapping.
That being said, there is a growing segment of the Australian lending industry that services startups. You can look through lending platforms to find the best options for your business.
New Zealand
New Zealand has a dynamic business environment supported by initiatives like Callaghan Innovation and the Regional Business Partner Network. There are co-funded grants as well as all of the traditional channels for business loans. But much like in the UK, businesses with existing cash flow are preferred, and there is a growing alternative loan space.
South Africa
Access to business capital remains a relative struggle in South Africa. But there are still initiatives like the Small Enterprise Finance Agency (SEFA) and National Empowerment Fund (NEF). Interestingly, South Africa boasts a dynamic and growing fintech sector, with many startups receiving support in incubators or through online lenders.
USA
The USA offers one of the most diverse business funding environments in the world. SBA loans, including startup loans, are often the preferred option. But there are a plethora of grants, investors, and business lenders that are willing to fund startups.
Netherlands
Dutch startups can benefit from programs like Qredits. There is also a large selection of other lenders that startups can seek loans from. The Dutch government also incentivizes lending and startup processes with subsidies and tax incentives.