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ByteStart’s Start-Up Guide – Part 13 – How to fund your new business

October 11, 2011

There are many different ways to raise money for your new business venture – certainly a lot more choice than just asking your bank for a loan.

Before you start, it’s best to look at your own assets first. Get a clear idea of how much money you are going to need to start your business, with the help of a professional such as your accountant.

Take it month by month: what money do you forecast will come in and how much will go out?

Don’t make the same mistakes that so many business start-ups do – underestimate costs and overestimate income. Take into consideration the potential perils of late payers and any likely seasonal effects.

Use your own funds

You have one option open to you if you want to be totally self-reliant: you can plunder your savings or cash in investments. It will hurt, but at least if the new business does go wrong you won’t have a heap of debt adding insult to injury.

If this is out of your financial reach, consider another low-risk strategy – starting off part-time, while working part-time for someone else.

Find a grant

Depending on what your business is, you may be eligible for a grant. This could be in the form of an interest-free loan, a match your investment or even an upfront a lump sum.

Look at the Prince’s Trust if you are under 25, as it offers grants in exceptional circumstances. Equally, look to your regional development agency, certain charities, or online grants directories. Try our guide to business grants as a starting point.

Borrow money

The next option, and arguably the widest used, is to borrow money. You may decide to re-mortgage your home, but this means if you cannot repay the debt as agreed, your house is under threat of repossession.

Credit cards are another possibility. Many a start-up business has been funded by the canny use of 0% interest introductory offers on a few credit cards. However, if you fail to pay off, or move, the debt in time credit cards can become a very expensive way of financing your new business.

Offers of loans from friends or family should be treated with caution. When it comes to the age-old warning of mixing business with pleasure, a truer word has arguably never been spoken. If things go wrong, valued relationships will inevitably suffer.

If you do proceed down this route, ensure you agree concrete terms before the loan is given. And then, back it up with a legally-binding agreement, signed by you and your backer.

Government funded start-up loan scheme

If you are 18 to 30 years old and live in England or Northern Ireland, you could be eligible to receive a business start-up loan through the government funded Start Up Loans Company.

Launched in 2002, the scheme aims to help young entrepreneurs who have a viable business idea but can’t access the finance needed to get their business off the ground.

Loans are charged at an interest rate of 6% and are repayable over 1 to 5 years. To date, the average loan size is some £5,400.

If your loan application is successful, you will also have a business mentor to help you on your way.

Invoice finance and factoring

You may also wish to consider invoice finance and factoring, where you sell your debt to another company. It’s a common cash flow aid for those businesses who have to offer credit terms on invoices, but cannot afford to wait 30, 60, or 90 days to be paid.

If you use a factoring company, you typically receive around 90% of the value of your invoices immediately. Your customers pay the factoring firm directly when the invoice is due. Factoring companies will typically charge a percentage fee.

Factoring is normally only an option for businesses that will be turning over a fair amount quite quickly.

Bring in an investor

If you want to seek an outside individual to help, your first port of call could be someone you have met along the way in business, who you know has money to invest. If you already have a rapport with them, they could make an excellent partner.

As you’ll already be aware if you watch Dragons’ Den, another option is to find a business angel.

Rather like smaller-scale venture capitalists, business angels are generally people who have already “made it” in business themselves, have plenty of spare cash floating about and want to invest in other businesses.

Either operating solo or as a syndicate, business angels are most likely to go with an innovative idea that’s not been done before. Typically, decisions are made quickly – but expectations for returns will be high.

The cash from an outside investor could be essential to get started. But are you really ready to hand over part of your business to a stranger?

They may or may not be helpful and hands-on, and will more than likely want to get more involved if things don’t go according to plan. Sure, they have the right to find out at regular intervals how you are doing, but it could create problems if they become unwilling to let you take general charge.

Business angels – what you need to consider

Before you decide whether you and a business angel will be a match made in heaven, here are a few pointers to consider:

  • As investors, they will want as guaranteed a return on their investment as possible. Sums invested are typically between £10,000 and £750,000. It will greatly help your cause if, as the business founder, you invest some cash too, even if it is only a small amount by comparison
  • How competitive could your business be? Any self-respecting business angel will want details of exactly how their money will be invested and the likely returns
  • Make sure you have every last scrap of financial information to hand when making a pitch to a business angel, or similar potential investor. In short, don’t even bother to turn up at the meeting if you don’t know your turnover, gross and net profit. If you’re past start-up, historical financial information is likely to be asked for too
  • But it’s not just about you trying to impress sufficiently to loosen their straining purse strings. It’s vital to work out the business angel’s motivation too. Are they out for a quick buck or do they have a genuine empathy for your idea? Check what other projects they have invested in and when – speaking generally, most business angels invest only once or twice a year. If it’s more than this, how dedicated to your cause do you think they will be?
  • Apart from cash, what else are they bringing to the table? Hopefully, the answer will include knowledge and experience. Check to see if your differing skills are compatible
  • Be clear from the start how you and your business angel will work together and discuss the business’s progress. Define them a role. Is it OK for them to turn up at your premises unannounced? Make it clear from the beginning what is and isn’t going to work
  • Ask the business angel about their likely exit strategy. If you both agree to a five year investment period, for example, it gives you both a clear, defined goal to work towards
  • Remember: angels are normally financially very astute. It’s likely they are going to be better number crunchers than you. With this in mind, you really should talk to a financial adviser about the intricacies of the potential arrangement, such as how much of your business you are willing to “sell”
  • Always be prepared to walk away from a potential deal if the offers from your investors do not meet up with the valuation you have placed on the business.

Further reading

The following guides will offer you more valuable information on the subject of business angels;

For dozens more dedicated guides to funding your business, visit our business finance section.

On to ByteStart’s Start-Up Guide – Part 14 – Getting paid and how to avoid late payment problems

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