If you are looking to start a new business, there is a good chance that you will need some funding to get it off the ground. Most businesses will have start-up costs, whether it’s securing premises, stock, equipment or hiring people, and they will all need paying for.
Some people might have savings, or a redundancy payment, they can use to fund their start-up, but others will need to find funds before they can launch their new business. However, as many prospective business owners find out, getting start-up finance can be difficult.
For someone who just wants to start their own business, negotiating the finance maze can be confusing and take up a lot of valuable time. So to help increase your chances of success, here are the answers to some common questions on how to fund a new business;
Q1. What financing options do start-up businesses have – and how do you decide which is right for you?
It is essential to decide what is the most appropriate form of finance required. This will depend on your type of business and what the finance is required to fund. Let’s look at a few examples;
Medium term loan or hire purchase
If, for example, a construction company needs to buy new equipment then a medium term loan or hire purchase could be suitable (hire purchase involves monthly payments to lease equipment, the equipment is “owned” once the full amount of the contract is paid) as this will allow the cost/payments for the new piece of equipment to be spread over a period of time.
All the ins and outs of business loans are explained in this Guide to Business Loans which you can download free. As well as highlighting the benefits and drawbacks of the different types of loans, it also gives you practical help to secure the right business loan for you.
Overdraft and/or invoice discounting
If, for example, a fashion retailer needs to fund the buying of stock then an overdraft could be a solution.
Invoice discounting and factoring might also be suitable. Invoice discounting is aimed at larger businesses where unpaid sales invoices are used as collateral, whilst factoring involves selling your “future sales” invoices to a third party which collects the full amount paying over a proportion to the business).
An overdraft would provide immediate funds and/or allow scope for future funds to be used for the growth of the business whilst invoice factoring/discounting will allow the business to spread the cost of the funding over time based on the future sales of the stock.
If developing a building project – then project finance that can be drawn down at key stages should be considered as this will provide necessary funds at the specific times when it is required.
If undercapitalised – a medium term investor would be more acceptable and will provide a more sustainable way of obtaining funds than, say, short term credit solutions.
Crowdfunding is an increasingly popular form of raising finance. It can take two forms; equity crowdfunding and rewards-based crowdfunding.
Equity crowdfunding is essentially a sale of shares in the company, whilst rewards-based crowdfunding offers ‘perks’ in return for money (in other words the person doesn’t invest in the company, they ‘buy’ something) for example if it’s a new piece of tech the funders may get the very first product, before its on general release, or they may get a personalised version of the product.
There are dozens of online platforms that facilitate crowdfunding campaigns, and you can find out more about this option here;
- 6 Things you need to know before launching a crowdfunding campaign for your business
- 10 Top tips to ensure your crowdfunding efforts are rewarded
Peer to Peer lending
Peer to Peer, or P2P lending as it’s frequently referred to, is another option. Here, you essentially borrow money from a group of other individuals. It has grown rapidly over recent years as businesses have grown frustrated with the reluctance of banks to lend, and savers have become disillusioned with rock-bottom interest rates.
You can find out more about P2P and Peer-to-Business loans in these ByteStart guides;
- A Guide to ‘Alternative Finance’ – the new funding options for startups and small businesses
- How peer-to-peer lending offers startups and businesses a new funding option
Q2. Lenders often like to see a ‘track record’ but as a start-up I don’t have one – so what can I do to give investors similar comfort?
For businesses with a track record it is always advised that accounts should be used as a sales document, for example abbreviated accounts do not explain how you’ve operated and future plans (they’re not a sales document), whilst full accounts are a more suitable sales document.
Clearly this is something to bear in mind in the future but it is not helpful to start ups that will not have accounts to present to the potential investor (in the case of limited companies or limited liability partnerships it can often be a year before they are ready to prepare accounts and for sole traders and partnerships they won’t be required to prepare accounts until 5 April).
Therefore as a minimum start-ups should have cash flow forecasts which are backed up with evidence as to why the forecast has been made.
You will also need a detailed business plan as this provides an opportunity to “sell” your business. It should include:
- What the business does
- Who owns the business, what are their expectations
- Who runs the business, what is their experience
- Who are your main competitors ( why are you better/how will you become better)
- What are your historical results
- What are your projected results (business plans gives more scope for outlining this than a set of accounts)
- How are you going to achieve the results
Online tools such as Brixx can save a lot of time and effort when it comes to producing cash flow forecasts and a professional business plan so are worth using.
Q3. What information is essential to provide when seeking finance, and how do I improve my chances of getting funding?
As noted above cash flow forecasts and a detailed business plan are essential when seeking finance. It is important to “sell” your business and provide as much information as possible. As a general rule always consider what your potential finance providers will need to understand, such as:
- What’s the money for and what are the potential benefits?
- Are the interest and capital payments affordable?
- What security is available?
- What are other sources of finance?
- How will the finance provider get their money back? (perhaps by way of a loan bearing interest and security over an asset); or
- How will an investor get a return on their investment (perhaps by way of issuing them preferential shares).
RELATED: What to do when the bank says “NO”!
Q4. Where can I go for help?
It is always a good idea to consult your accountant as they will be able to advise on the different finance options available, as outlined above, and which would be the most appropriate option for your business. They will also be able to advise on the accountancy and tax consequences of each option.
Accountants often have links with business angels networks. These are usually groups of private investors who individually invest smaller amounts (usually around £100k) in a small, private business.
Just like the Dragons in the Den these individuals are looking to get as big a slice of the company as possible for their money. Ask your accountant for advice – they will know the network and if it is suitable for your business.
Lawyers can also be consulted when looking to finalise a finance option particularly if agreements are required to be drawn up between the investor and the business, it is essential that any agreement is formalised in order to protect all parties. Financial institutions will always ensure sufficient agreements are drawn up but it is just as important for these agreements to be prepared for any investor/finance provider even if they are friends and family.
Whatever finance option you choose it is best to get professional advice – choosing the right finance route and agreeing the right deal are both essential elements if you want to protect the future of your business. Get it wrong and your business will suffer – and may even die.
More tips on money matters
You can find lots of help to get your head around your business accounts and finance in these other guides;
- How to choose the best online accounting software for your business
- Guide to Bookkeeping for new business owners
- 15 Questions to ask when hiring an accountant for your small business
- Staying on top of your company accounts – Book-keeping Dos and Don’ts
- Book-keeping basics every new business owner must know
- Why financial forecasting is important for startups, and how to do it painlessly
- The way to get paid – 12-Step Action Plan to stop customers from paying you late
- 8 signs that a small business may be approaching insolvency
- ByteStart’s Guide to insolvency, liquidation and bankruptcy for business owners
- 10 late payment excuses used by customers – and how to deal with them
- ByteStart’s Guide to the main business taxes
- Dividend tax changes from April 2016 – A summary of the financial effects for small business owners
- Tax rates, thresholds & allowances for small business owners 2015/2016
- How are limited company dividends taxed?
- 10 common Self-Assessment Tax Return mistakes and how to avoid them
More on starting a business
ByteStart is packed with help and tips on all aspects of starting and running your own small business. Check out some of our most popular guides;
- 5 things you must do when you go self employed
- 10 advantages running your business as a limited company has over being a sole trader
- A limited company or self-employed – which is best for me?
- How to set up a limited company
- How to create your own support team and increase your startup’s chance of success
- How to attract customers from heaven – not clients from hell!
- How to get your business noticed – Self-marketing for start-ups
- 5 common branding mistakes to avoid making with your small business
- 10 Top tips for small businesses starting out with social media
- 7 clever copywriting secrets for business owners
- Which types of insurance must your business have?
- The Consumer Rights Act 2015 – 7 Key points for small businesses
- Why it’s vital you have clear ‘Terms & Conditions’ for your business
- Becoming an employer – Your responsibilities when you hire staff
- Health & Safety compliance for small businesses – where do you start?