Starting out in Business - Financing in the United Kingdom

New business financing

When starting out in business, you may find that you need money to start up ( I am well aware that this is not always the case. I did not need money when I was starting up, but I am finding that I need money to 'stay in the game' as they say). The vast majority of new businesses need funds to buy equipment, perhaps rent a building as well as meet any advertising and marketing costs. This is before any money has been exchanged or a sale been made. When the business is up and running, then you will need to have money in order to keep the business going and pay the bills. It is important to note that many businesses fail in the first 2-3 years. "The main reason?" I hear you ask. "Bad idea?" Possibly. "Inadequate marketing?" Perhaps. "Insufficient research?" Sometimes. But the principal reason for businesses failing, especially small businesses, is that they simply run out of money.

When searching for money to start your business, it is important to look at the range of financing that is available. There are many options out there. You may choose to use one, some or all of the methods that are open to you. It is very important that you do your research before choosing what you will use to finance your business. Much depends on what your business needs and what you need the money for. You can borrow the money from family and friends; take out a bank loan; use a "business angel" or venture capitalist; or use a business grant to get your business off the ground. This article will look at some of these options and see how they can help the budding entrepreneur.

When deciding what finance you will need for your business, it is very important to have a business plan in place. Not only will it help you set out how you will run the business, it will also include financial forecasts (such as cash-flow, balance sheets and a break-even analysis to name just a few). This will help you to calculate, more accurately, how much you will need to fund your business, what you will need to buy in order to run the business and when you will need the money. If you do not know how to write one and what you should include, you can read my Factoid on this subject here. You may be surprised in setting everything down on paper that a realistic look at your needs shows a much less naive total than the one in your head.  Having a good business plan will make it easier for you to raise the money that you'll need, as it will explain your business to banks and other potential investors. Furthermore, it shows that you know what you are doing and this will make you a more attractive option for them to take a risk on.  It is extremely important that your figures are accurate. Not only do you have to cover any start-up costs, but you will have to look at how much it will take to run things in the first six to twelve months. Your customers may not pay you right away, but you will still have bills to pay.

So here are some options available to you for raising finance for your business. They all have their pros and cons and require careful consideration before being applied for and used. You may need just one, you may need them all. Are you sitting comfortably? Then I will begin . . . .

1. Your own money - during this time of economic problems, many people are losing their jobs and being made redundant. Some have used the opportunity as well as their "redundancy package" to start their own business. They are also using some of their savings to do so. This is a useful option if you do not have access to other methods of financing. If you do not have savings, there are other ways of raising the finance yourself, but be careful in your calculations so that you can manage and eventually pay off the debt. The options are:

  • Remortgaging your home
  • Selling any possessions or assets that you do not need in order to raise the funds
  • Unsecured Loans and/or credit cards - make sure that you do not overextend yourself

The advantages of doing this is that you have more control. (If you use outside help, they may withdraw their financial support and will expect a return on their investment.) The disadvantages of taking this route is that if things do not work out, you risk losing your possessions and your home.

2. Your loved ones - They may be able to back you with any money they have. Furthermore, they may have some equipment they can contribute to you. They could either give you the money and /or invest by buying shares in the company. They may want to see the business plan to see where their money is going and what the long term goals are for the business. You should also have a repayment plan in place as this will help prevent misunderstandings in the future.

The advantages of this is that they will be more willing to help you out financially with easier repayment terms than a bank or an investor. Along with whatever finances you yourself have and whatever the family has, then, a bank may be more willing to lend to you. The disadvantages are that, if your business does not work, your family may stand to lose their possessions as well as their money. So be careful before asking them and make sure they give you only what they can afford to possibly lose. Do not not pressure them into giving more than that, or it could lead to problems in the future.

3. Banks and lending institutions - If you have a complete and coherent business plan, then it may be possible to get funding from bank loans. There are different methods of doing this - business overdrafts and loans. Before the bank considers your application for a loan, they will ask for a few things in addition to the business plan. These include:

  • Personal investment into the business
  • Security for the loan that they will provide (collateral)
  • A good track record and reputation in business

If you cannot supply these, you may get some government funding such as Enterprise Finance Guarantee Scheme (available in the UK).

Business Loans vs Overdrafts - which is better? Well, it depends on what you are looking for and what your business needs.

A loan is more long term and you can easily budget for repayments. However, you will have to offer some security in order to get your loan and it can be very inflexible, resulting in possible cash-flow problems in the future.

An overdraft is simpler to get and you only pay interest on the amount that you are overdrawn; and it' s more flexible for meeting short term requirements. However, they tend to have higher rates of interest and can be demanded back any time. You can ask for the overdraft to be extended but this may incur additional arrangement fees.

4. Outside financial assistance - this means having venture capitalists or "business angels". They can offer substantial sums of money in exchange for a share in the business. When the company is profitable, they will gain money. When the company is losing money, then they could lose their investment.

  • Business Angels - these tend to be wealthy individuals who invest about £15,000 upwards. They can also act as mentors and advisers to the new business owner.
  • Venture Capitalists (VC) - these offer much higher investments from about £1 million upwards. This is because they believe that they will get a high level of return on their investment later on in the future by selling their investment.

Much like the banks, you will need to have a good business plans as well as evidence that you can manage your business successfully (you may have to "pitch" your idea, so presentation skills are crucial here). Make sure that the plan has detailed and realistic financial forecasts, showing how the business will benefit from the investment and what the investment will pay for.

The advantages of using these are:

  • You get more than money - you get mentors, advisers and experience from the business angel/VC
  • You do not need to start paying them back until the business can afford it
  • Banks tend to be impressed by this and may offer better deals for you

However, it is worth noting that you will have to sacrifice a share of your business and its profits, and this can lead to problems in the future. The investor may want a greater say in the business and restructure it in a way that you may not want but will make it easier for them to sell.

5. Government funding/grants - Depending on where you are and what your business does, you could be eligible for government funding. You could get either an interest free loan (or a low interest one) or even cash. Furthermore, you could get advice, consultancy, information and support which is vital for a new business.

In the UK, there are several grants that are available. They include:

  • The Enterprise Finance Guarantee - this helps businesses that would not normally have access to loans
  • Small Loans for Business - as the name suggests, it offers loans of up to £50k to SMEs that have credible business plans but have been refused other types of finance for their business

The main advantage of a grant is that you can get the cash for what you need without having to pay it back. The loans are usually long term, flexible and offer competitive interest rates. However, there are some disadvantages:

  • Very long application process with no guarantee that you will get the funding that you need
  • There is A LOT of competition for the few resources out there
  • The funding may not cover all your costs, you may have to get additional funding
  • There are usually strict criteria to meet

So before you apply for this, calculate how long you can afford to wait and if the amount of money requested is worth it. There are additional funding options, especially if they are part of a special group such as minorities or businesses that are set up in a disadvantaged area. So look out for these.

You may be one of the lucky ones that do not need any money to start their business. I just needed a computer, a phone and a lot of persistence. That sometimes may be all you need.

I am not so sure how things work in the United States with regards to funding for business, just that the Small Business Administration (www.sba.gov) is responsible for this area. They do not give grants for new and start-up businesses but do offer loans and VCs. I would be delighted to know people's experience of the SBA as well as getting more information as to how they work.

Take care and God bless readers.

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