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How to fund your business – Overview

October 8, 2011

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 is one of the most important tasks. It 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 and some charities.

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 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.

You can also try getting a business start-up loan.. Before approaching the bank make sure you read our Secrets to securing a business loan.

Borrow from families, friends and fools

This is a phrase commonly used by business advisers! 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 collects the money from your customer when it’s due.

The factoring company will charge you a fee and a percentage of the value of each invoice. It might stop you needing to borrow a lump sum just to keep your cash flow healthy. Read our guide to factoring and invoice finance for further details.

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 main types of equity investors. Venture Capitalists are typically large firms that put in £1 million or more. Business angels are private investors who will offer smaller investments, from a few thousand pounds upwards. Sometimes several angels will club together.

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

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