Before your fledgling business begins trading, you need to ensure that you have sufficient funds available to sustain the business throughout the difficult first few months before the expected revenue begins to appear. You will need to allow for set up costs, such as premises and plant, and also initial running costs which may include materials and utility bills. We will now examine some of the funding options available to businesses.
Personal savings, family and friends
Friends and family may be prepared to loan you some money, either interest free or on ‘softer’ terms than a bank loan. They may also be interested in becoming a ‘sleeping partner’ where they invest in the business and receive a share of the profits without having any other input. However, this would have implications for the legal status of the business. The disadvantages of receiving money from family and friends are that if the business is not as successful as predicted, personal relationships may become strained.
The Government offer several initiatives to assist business start ups both nationally and local schemes. Funding is often available to those who fulfil certain criteria and so may not be available to everyone. Some initiatives offer match funding whereby you are required to provide 50% of the necessary amount and the government will match this commitment. Some local schemes may be restricted to those living within a certain geographical area or trading in a particular line of work. Local councils may also work with local Development agencies to provide finance for those who cannot obtain this through the traditional channels.
Most major banks offer business loans and you are encouraged to shop around to find the best deal for you. It is unlikely that the bank will offer an unsecured loan and will normally need some form of security, for example, your house or if your business is already trading some business asset. You will be required to pay interest on the full amount of the loan, so it is important to be accurate about exactly how much money you will need to borrow.
Banks may also offer a pre-arranged overdraft on your business account.
Some credit card companies now offer cards specifically for business use and may offer introductory interest free periods. Credit cards are good for short term finance, but should not be used for long term borrowing due to the high interest rates.
Private equity investors
Private Equity Investors are a third party who would invest in your business for a share of the company, like the dragons in the BBC television programme, ‘Dragon’s Den’. This option is only open to limited companies. The equity is not usually secured against the company’s assets. Therefore, the investor will lose money if the business fails.
Venture capitalists inject finance into a company in exchange for share capital or equity. So, you would surrender an element of control of your company to obtain the necessary funding.
Business Angels are private financiers who invest capital into new or developing businesses. The British Business Angels Association matches business angels with new companies seeking investment.
There are a number of organisations both nationally and locally that may offer financial support to businesses.
Enterprise agencies are often set up to develop business in particular areas of the region, typically inner city.
Applying for funding – final thoughts
Check that you are eligible for the funding before applying. The process can often be time consuming and you don’t want to waste time applying if you don’t fit the criteria.
Prepare a business plan. Most organisations will need to see evidence of advance planning and financial projections before committing any money to the project.
Take care to ensure that you can realistically make any repayments on any loans or grants.
Seek assistance from a business mentor/advisor when identifying pockets of available funding.