How to fund your business - Overview

   

One of the least exciting things about starting your own business is getting the finances sorted out (unless you’re an accountant of course).

But it’s one of the most important things. Doesn’t matter how good you are at what you do – if the money runs out, your business is dead.

Before starting up, you should have a clear idea of how much money you are going to need to invest into your business. Even companies that are quickly profitable can burn through a fair amount of cash at the beginning.

Do a simple forecast for your first year: For each month, what money will come in, and what will you spend? Most people overestimate revenue and underestimate costs, so take account of that. And think how late payers and seasonal effects could put extra pressure on your cash flow.

You should now have an idea of how much cash you’re going to need to fund your business. There are several different ways to find this money:

Use your savings: The safest and cheapest way to fund a business. If it goes wrong, you’ve only lost your cash, and won’t be lumbered with a load of debt.

Do it part-time: Could you start your business while continuing to work for someone else? You may struggle to grow past a certain point, but it could help to ease the financial pressure. This has the added bonus of being a low risk way to prove your business idea works.

Get a grant: Several organisations may give you a lump of cash you won’t have to repay. Your eligibility normally depends on you, where your business is based and what it does. The Prince’s Trust offers some grants in exceptional circumstances. Other grants are available from the government, EU, regional development agencies, some charities and Business Link. They have a searchable directory of grants here.

Borrow some money: Many small businesses are started using personal debt raised by the owners. Unsecured loans give you the advantage of fixed repayments over a certain period of time, helping your financial planning. It may be cheaper to borrow more money on your mortgage, but you will have debt secured on your home, making the risks higher. You can also read our guide to small business loans.

You could also use overdrafts or credit cards, although these are expensive and unreliable ways to borrow money in the long-term. If you do manage to secure commercial funding, it’s possible the bank will demand your house or other property as equity.

Borrow from families, friends and other idiots: A phrase used by business advisors! If people you know want to lend you money, agree concrete terms first and get a legally binding agreement signed. It’s easier and cheaper to sort these things out before problems crop up.

Lease things: If you don’t need to own equipment, why not lease it? This can work out more expensive in the long-term, but will help your cash flow when you’re starting up.

Factoring: This is where you sell your debt to another company. It’s normally used by businesses that must offer credit terms on invoices, but don’t want to wait 30, 60 or 90 days to be paid. The factoring company pays you immediately, and gets the money from your customer when it’s due. Although the company will charge you a percentage fee, it might stop you needing to borrow a lump sum just to keep your cash flow healthy. You can read more about Factoring and Invoice Finance here.

Equity: This is where you give up a part of your business in return for an investment of cash – what you see on Dragon’s Den. It’s a lot harder to pull off in real life. You need a sound business idea, a solid business plan, and a good opportunity for fast growth. Then you need to find potential investors and pitch to them.

There are two types of equity investors. Venture Capitalists are typically large firms that put in £1m or more. Business Angels are private investors who will offer smaller amounts, from a few thousand up to £100,000+. Sometimes several Angels will club together.

For the investors, the risks are high, so they expect a good return on their investment. And it’s likely they will want to be involved with the strategic decisions you make in your business, as it’ll be partly their money you’re working with!

Remember to get professional advice from a qualified accountant before taking any action. Don’t rely purely on information contained in this article.

Further Reading on Bytestart

• A guide to raising money
• A practical guide to business grants
• A guide to small business loans
• Angels or Dragons - who do you trust?
• How to boost investor interest in your startup

• Free Accounts Software for small businesses - Download TAS Basics Now!
• Starting Up? Get 18 months free banking, and much more from Lloyds TSB!
• Home Business Insurance - Save money with Direct Line for Business. We guarantee to beat any quote for the same cover. Immediate quote available.