How to Successfully Raise Capital for Your Business

Small Business Tips

Hugh Acland Commercial Director At Capital On Tap

Hugh Acland 03 May 2024 minute read

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There’s no one-size-fits-all approach to how much it costs to start a business and raise capital throughout your journey as an entrepreneur. The initial set-up fees can differ a lot depending on several factors, such as the location or industry you’re setting up in, as well as the experience or financial situation of the business owners themselves.

From personal investment to high-interest bank loans, our latest survey delves into how much it costs small business owners in the UK to set up their businesses, the most unexpected costs they faced and how they tend to raise capital.

Hugh Acland, Commercial Director at Capital on Tap has provided expert advice on how to approach these different fundraising strategies. We’ve also done a deep dive to reveal just how far small business owners would actually go to keep their company afloat.

How much it costs to set up a business

Our survey reveals it costs on average £21,193 to start your own business in the UK, with young entrepreneurs aged between 18 and 24 spending the most, at just over £46,000. On the other hand, business owners aged between 35 and 44 say they spent nearly three times less than this, with an average cost of £15,671 to start their company. Female entrepreneurs spend an average of £6,800 more than their male counterparts at £23,751 compared to £16,950.

The industry you enter will impact the expected startup cost. From stock, to equipment and software, each one has its own requirements that need to be taken into consideration.

The top five most costly industries to set up a business in include:

Rank	Industry	Average cost to set up a business
1	Real Estate	£60,375
2	Hospitality	£55,571
3	Agriculture and Farming	£46,250
4	Manufacturing	£25,090
5	Financial Services	£23,730

Real estate companies cost the most to set up, at over £60,000. At the other end of the scale, entertainment and events companies, including event planning and party supplies are the cheapest to set up, costing just over £5,000. With a difference in set-up costs reaching over £55,000, it's important for budding entrepreneurs to really consider how costly it will be to set up a business in their specific industry.

Location is also an important consideration when it comes to setting up any business, from making sure you have the right demand and customer base to seeing what the average income is in different locations. This could be why the price to set up a business varies greatly across the country.

Rank	City	Average cost to set up a business
1	Norwich	£34,250
2	Birmingham	£33,020
3	Manchester	£26,915
4	Sheffield	£26,750
5	Newcastle	£24,541

Norwich is the city with the most expensive costs to set up a business, at over £34,000. In comparison, entrepreneurs in Nottingham spent an average of £7,626 to start their company, the lowest of all the cities. Interestingly, London ranks in eighth place, costing an average of £20,797 to set up a business.

What are the most unforeseen expenses when setting up a business?

Things like marketing fees or an office lease might be the more obvious costs involved with setting up a business, but what are the most common unforeseen expenses that business owners have faced?

Rank	Hidden cost	Average cost
1	Payroll	£3,679
2	Inventory or stock	£2,762
3	Repayment of loans and financial arrangements	£2,606
4	Taxes and compliance	£2,509
5	Equipment and technology costs	£2,236

For small business owners in the UK, payroll costs surprised them the most when setting up their business, with those surveyed saying that these have unexpectedly set them back around £3,679.

Lots of businesses don’t realise how much inventory or stock is going to cost them in the initial instance either, and this has come in as the second most expensive hidden expense, averaging £2,762.

If you do borrow money, whether from a bank or a loved one, you will more than likely have to pay this back eventually. Repayment of loans or financial arrangements is the third most costly unforeseen expense, setting businesses back roughly £2,606 in the setting up stage.

Hugh Acland says, “Lots of businesses will be hit with unexpected costs at some point in their journey. In this instance, taking out a business credit card can be a very useful tool for giving yourself more financial leeway.

“Not only will this help with cash flow as you wait for profits to come in.”

Hugh says, “If you are paying off interest on your loans, spending on a business credit card could help cash flow. They can help reduce the reliance on fixed-interest loans, potentially offering interest-free spending if the full balance is paid off by the due date, meaning they can be a very useful tool to give more financial leeway.”

How do small business owners raise capital?

So, we know roughly how much it might cost to start a business, but what are the most common ways to raise capital throughout the course of a business's life?

Rank	Method of raising capital	% who used this method
1	Invested personal funds	61%
2	Secured a bank loan or line of credit	25%
3	Received financial help from family	22%
4	Obtained a small business grant	16%
5	Received financial help from friends	10%

Personal funds

The most common way to raise funds is for small business owners to invest the money themselves, with 61% of respondents in the UK using personal investment to raise capital.

Hugh says, “Self-financing can give you a lot more control over your business than other options such as investors or bank loans. It also means you’ll retain full control, so you will reap the full rewards when you start to turn a profit."

“However, using your own money does have its risks of course, and you need to make sure that you still have enough money to support yourself."

“Using your own funds might mean you also find you’re a little limited in terms of what you can afford, which might affect your business growth. It could be that you use some of your own savings, but then look to get some sort of loan or grant to really get your business off the ground.”

Bank loan or line of credit

Getting a bank loan or line of credit is the second most common way of raising capital, with a quarter of those surveyed saying this is how they have funded their business.

Hugh advises, “Most banks will offer some sort of loan. This is usually given in a lump sum which you’ll pay back over a set period of time. It’s not always easy convincing a bank to loan you cash though, so you’ll need to put together a solid business plan and include a budget to show how you’ll afford the repayments.

“The government also offers various grants for start-ups and SMEs, so it’s worth doing your research to see what financial options might be available to you.”

Help from family or friends

22% of business owners have also received financial help from family. On top of this, one in 10 business owners in the UK raise capital with financial help from their friends.

Hugh says, “When borrowing money from friends or family, communication is key, and you need to make sure you establish clear expectations from the get go.

“It might be that they want to invest in your business, and therefore will expect a share of the profits or some form of involvement. You should iron out exactly what you both expect this to look like before you take the money, to avoid any disappointment from either party.

“If the money is more of a loan, make sure you’re clear on when they expect to be paid back, and whether this will include interest or other contingencies.”

While government Start Up loans (5%), crowdfunding (4%), and finding investors like angel investors (4%) or venture capitalists were among the least popular methods for raising capital, they can still be viable options depending on the business's stage and growth potential.

Venture capitalists, in particular, are well-suited for fast-growing companies in need of substantial investments and guidance in exchange for equity ownership. Government Start Up loans can help new businesses without collateral or track records, while crowdfunding can work for businesses with products or services that can attract widespread public interest.

How far will small business owners go to keep their company afloat?

We also asked small business owners how far they have, or would, go to support their business.

A big port of call for financial help is loved ones. Just under one-third (31%) of small business owners in the UK would be willing to ask friends and family for money if it meant saving their company. Notably, 44% of those in the personal care industry (for example, hair or nail salons) said they have done this to ensure the success of their business.

Gen Z business owners seem to be the most open to asking friends and family for money to support their business, with 45% saying they would do so, compared to just 26% of the over 55s.

Sometimes you have to go to even greater lengths to keep your business afloat. In fact, 16% of business owners say they would be willing to remortgage their house if it meant their business survived, and nearly 1 in 10 (9%) have already done this. Interestingly, 67% of respondents who work in the agriculture and farming industry reported they have remortgaged their house to keep their business going.

Small business owners aren’t shy of raising funds through slightly less traditional methods either, as nearly a quarter (23%) say they would be willing to use a crowdsourcing platform or community fundraising initiative. Looking closer at the industries most likely to do this, 50% of those who work in agriculture said they have used this method.

However, the most common way to keep a business afloat is perhaps a more tried and tested method. Over half (54%) of those surveyed said they would restructure or downsize the business to keep it afloat. The industry that stands out here is the entertainment and events sector, with 91% of those who work in this field said they would be willing to do this to support their business.

Raising capital as a small business owner

Hugh Acland from Capital on Tap says, “Every small business owner wants to grow their company, but with so many methods of doing this, it can be hard to know where to begin.

“It's crucial to start with a detailed business plan. This plan should outline your business objectives, the market you're targeting, your competition, and a clear financial strategy. Determine your business’s financial needs and decide which method of raising capital you are going to take — whether that’s a bank loan, crowdfunding, investing your own funds, or any other source of injecting money into your company. It should also define your long-term vision and the steps you need to take to reach it.

“As you move forward, stay adaptable, be prepared for setbacks, and keep your focus on creating value for your customers. With dedication and the right resources, your business can continue to grow in a competitive landscape.”