Internal sources: your own money and profit you have already made

1. Personal savings: money the owner puts in from their own bank account, which is how most UK start-ups get going before any outside backer will take a risk on them.
   1. Advantage and drawback: savings cost no interest and give away no share of the business, but the sum is capped by what the owner has managed to put aside, and it is their own money that disappears if the firm fails.
   2. In practice: Ben Francis began Gymshark in 2012 by screen-printing in a garage rather than renting a factory, because savings set a hard ceiling on how big the first step can be.
2. Retained profit: profit kept back from previous trading years and spent on the business, such as a bakery using £20,000 of past profit to fit out a second shop.
   1. Advantage and drawback: it carries no interest and needs nobody's permission, but a business in its first year has no past profit to draw on, and every pound reinvested is a pound the owner has not taken home.
3. Internal sources cost nothing in interest but are capped by what the owner has saved or earned, while external sources can raise far larger sums in exchange for interest or a share of ownership.

External sources: larger sums, paid for in interest or in ownership

1. Loans: a fixed sum borrowed from a bank and repaid in regular instalments with interest over an agreed period, such as £30,000 over five years to buy a delivery van.
   1. Advantage and drawback: the owner keeps every share of the business and can budget for a known monthly instalment, but interest makes the total repaid larger than the sum borrowed and the instalment still falls due in a month with no sales.
   2. Watch the security: a bank may also demand security such as the owner's home, so a business that fails can cost the owner an asset that was never part of the firm.
2. Share capital: money raised by selling shares, which is open only to a company registered at Companies House and never to a sole trader.
   1. Advantage and drawback: share capital never has to be repaid and carries no interest, so the cash stays in the business, but ownership, future profit and votes are shared, and enough new shareholders can outvote the founder.
3. Venture capital: one investor puts in a large sum where a bank would refuse, betting that a fast-growing firm will be worth far more later.
   1. Advantage and drawback: the business gets a sum no bank would risk, plus the investor's experience and contacts, but it hands over a large stake and a say in decisions, and that investor expects to sell the stake at a profit within a few years.
   2. In practice: Levi Roots turned the £50,000 he won on Dragons' Den in 2007 into Reggae Reggae Sauce stocked by Sainsbury's, because the investor's contacts opened doors that the cash alone would not have opened.
4. Crowd funding: many people each pledge a small amount through an online platform, so 2,000 pledges of £25 raise £50,000 without any single backer risking much.
   1. Advantage and drawback: a campaign raises money and tests demand at the same time, but if the target is missed the pledges are usually returned and nothing is raised, while the idea sits in public where a rival can copy it.

The six sources side by side

Read the table one row at a time, so that you see for each source where the money comes from, what it gives the business and what it costs in return.

1. The two internal rows charge nothing at all, but notice their ceiling: they are capped by what the owner has already saved or what the business has already earned, so they can run out long before the plan is funded.
2. Every external row charges either interest or a share of ownership, so the real question is not which source is best but which of those two prices the owner would rather pay.
3. Compare the drawback column rather than the advantage column when you choose, because the advantages read much alike while the drawbacks are what actually rule a source out for a particular business.

Judging which source suits a start-up and which suits an established business

1. A start-up has no trading record and no past profit, so a bank will usually refuse a loan or demand the owner's home as security, which leaves personal savings, crowd funding or venture capital as the realistic options.
2. An established business with several years of accounts can show a lender steady sales, so it can borrow more cheaply or fund growth from retained profit, and it rarely needs to sell a stake at all.
3. Which source wins depends on how much money is needed, whether the owner will give up control, whether there is a trading record a lender will accept, and whether the business can afford fixed repayments in a bad month.
4. For a small start-up needing a few thousand pounds, savings topped up by crowd funding is usually the stronger choice, because unproven sales cannot safely carry monthly repayments, while a firm with reliable revenue and a large plan should take the loan or the share issue and keep the growth it can now pay for.