You have finally made the leap by deciding to start our own business. You have researched the idea, done your figures and even made a plan, but now comes the daunting bit - how to raise funds for your idea
Finding funding doesn't have to be daunting. Begin by working out what your new business is going to need, think in terms of equipment, raw materials or stock, money to pay wages, rates and taxes. For example, to start up a high street cafe, you might be able to borrow all the money you need using various forms of debt financing, but if your ambition is to own a larger, nationwide chain like Coffee Republic, some form of equity funding would be a better option.
By now you should have a business plan. Make sure that it shows that you have planned ahead for likely scenarios such as customers not paying on time. It is also essential to predict for any cash shortfalls; for example, if you are starting a winter sports business, you will need some provision to cover the quieter summer months.
There are three main finance options that you should consider for your new business:
Grants and Awards
Debt Financing
Equity Finance
Grants are either non-repayable or given as loans with generous terms. They are usually given for specific purposes like encouraging business in particular areas such as the Enterprising Woman Pre Start Grant for women in Glasgow or within particular groups such as the Prince's Trust which provides assistance for 16-30 year olds. Business link is an excellent starting point as well. Awards are usually competitions which reward excellence such as The Women Mean Business Awards won by Linda Bennett, the founder of LK Bennett, which has an award of £10,000. On the down side however, grants and awards can be time-consuming to find and apply for.
Here, the amount borrowed is repaid with interest over a period of time. It is usually more suited to smaller ventures such as high street shops or home-based businesses.
Advantages
- You do not give up any control of your business
- Arrangements are straightforward and can be terminated pretty easily
- Lending decisions can be made in a matter of days
- The lender will expect their money back whether or not your business succeeds
- Defaulting could mean that you lose your security eg your home
Friends and Family: Don't overlook this source as they are often easier to approach than financial institutions and you might be able to negotiate better terms for the loan. Use your network of friends and family to help support you and your new venture; perhaps they have office space that you could borrow until you find your feet, even the use of a photocopier the odd afternoon would cut some of your administration costs dramatically.
If you are approaching your friends and family for funding, they will still need to know how and when they will gain from their investment and their role, if any, in running the business. But be warned, if the business fails you could run the risk losing your friends or causing a permanent rift in your family.
Bank loans: Loans are good for acquiring equipment that has fixed costs such as hair dryers for a new hairdressing salon. This way you can budget accurately for the repayments.
Depending on the amount, the bank may ask for some sort of security, such as your home, which can be sold to cover the loan amount if you default. If you are unable to obtain a loan because you don't have any assets, try the Small Firms Loan Guarantee Scheme. This scheme ensures funding under certain circumstances to those who have not been able to obtain loans.
Overdrafts: These are more suitable for a short-term boost in cash flow needed for day-to-day expenses. For example, you might need it to cover a sharp hike in the cost of suede for your soft furnishings business, before you can cover the loan through the subsequent sale of furnishings.
However, overdrafts usually have higher interest rates than loans and unlike bank loans, can be recalled at any time by the banks, even if lending conditions have not been breached.
Finance companies: Subsidiaries of banks and manufacturers, eg Ford Credit, offer hire purchase and leasing financing. The advantages to this sort of financing is that you do not buy and own equipment such as computers, which could become outdated quickly, but at the same time you acquire the use of assets without paying a bulk sum. On the down side, you end up paying more than if you had bought the assets outright and you cannot use the assets as security for other funding while it is not owned by you.
- Hire Purchase Hire purchase is an agreement to buy an asset through repayments to the finance company over a period of time. Available from most high street stores, agreements are usually quite flexible, for example interest free periods, provided you have a good credit rating. On the other hand, you will still have to maintain the equipment even though it does not legally belong to you until the final payment.
- Leasing: Leasing is similar to hire purchase however the finance company buys the assets from the manufacturer and the agreement between you and the company is tailor-made. You can lease assets ranging from photocopiers to cars. Unlike hire purchase, you never own the assets but you are not restricted to what is available in the retail outlet. There are also tax benefits, as you do not pay tax on the costs you incur. Unfortunately, it can be difficult for small companies to obtain leasing finance.
This provides large amounts of medium- to long-term finance. Investors only profit if your business succeeds. It is suited to businesses with ambitious growth plans such as Lastminute.com's need to buy out other businesses in a bid to build the UK's leading online travel business.
Advantages
- No security is required
- Investors bring experience and contacts
Disadvantages
- An amount of control and share of the business is lost
- Investment decisions can take months
Business Angels: These are private individuals who invest their own funds in small businesses and sometimes contribute hands-on assistance. They typically invest amounts between £10,000 and £250,000. With this option, the business can retain more control than with venture capitalists. For more information, contact the National Business Angel Network.
Venture Capitalists: These are professional investors providing amounts upwards from £250,000. This option is more suited to a company forecasting a rapid growth rate, with an ambitious team that will require a series of cash injections, a perfect example is almost any dot.com business. The British Venture Capital Association provides a directory of venture capitalists.
Remember that there is a finance option for everyone, and if you get knocked back by one financial institution it doesn't mean you won't get accepted by another. The key is to have a good understanding of the financial projections of your business and work back from there. Stay positive and good luck!
Why not chat to other iVillagers on the Money Matters message board. Take a look at some of the LIVE discussions taking place on the message board right now: