Start-up Business Finance Options
Starting a business is a very exciting time for entrepreneurs, but it can also be the most daunting. Often the greatest concern would be to raise the appropriate business finance needed to get going.
An entrepreneur might have an excellent business idea and knowledge of how to market and manage the idea to turn it into a successful business. However, if sufficient business funding can’t be raised, it is less probable that the company will be commenced.
Luckily, there are still options for funding new companies, but finding and securing the cash requires careful research, good negotiating skills, and, above all, an unrelenting commitment to launching your new business. The entrepreneur needs to be able to address the following concerns:
- How much finance is needed?
- Whether the entrepreneur is willing to borrow or give up some ownership of the start-up in return for investment?
- How long is the start-up finance needed for? – Short-term or long-term?
- In the case of borrowing, what security can be provided?
Sources of finance for new businesses
In this current economic climate, banks are getting increasingly wary of lending to SMEs. However, there are other ways of securing funding for new starts. Before we outline the several sources of start-up finance, it is important to take into account the purposes of this funding:
- Set-up costs – costs incurred before the business starts to trade
- Fixed assets such as equipment and premises that the business needs before it begins to trade
- Finance for inventory such as raw materials
- Payroll – even if it is just yourself
- Growth and development e.g. extra investment in capacity
Start your capital search with a good business plan that shows investors and lenders your company’s potential. Fully comprehend your available resources and you should be on your way to uncovering a source that fits your new business’ financial needs. Below are some suggestions for options that could raise start-up cash for your business.
As a founding entrepreneur, if you’ve got some capital, you can choose to invest it into your business. This is a common method of financing a start-up. Once the investment has been made, it is the company that owns the share capital. You retain full control of the business and enjoy full dividends once the business starts to make profits.
Invoice Finance (Factoring)
Factoring could release up to 90% of the funds locked up in your unpaid invoices, usually within 24 hours of the invoice being raised – you could have access to funds as soon as you start trading. The facility grows in line with your sales turnover and allows you take advantage of early supplier discounts. In addition, the factoring company manages your sales ledger which enables you start your business without any fear of defaults. This could be a suitable business loan that could enable you cover your start-up costs.
An overdraft facility enables businesses to obtain short-term funding. It’s an agreed form of finance where the bank sets the amount of money you can borrow in return for a high interest rate. An overdraft allows businesses to make payments from their current accounts exceeding the available cash balance. The bank may require some form of security before offering the facility – this mostly applies to large overdraft amounts.
However, the amount loaned is repayable on demand by the bank. They may do this if they are concerned about your ability to repay the debt, or reassessing their own risks. Watch out for your expenses or you risk having the facility withdrawn or having to pay extra charges.
Banks are still a popular resort in terms of raising finance. A bank loan is an agreed amount of money provided by a bank, usually secured on business or personal assets. It’s a longer-term kind of commercial finance and is suitable for financing investment in fixed assets. In return, you are obliged to repay a fixed amount of money in regular instalments, in an annuity. A shortfall to this form of finance is that the bank may be wary of lending to you in the first place, especially if you do not have any trading history. Preparing a bank loan application can be a difficult task because the availability of the loan depends on the funding required, collateral security and the entrepreneur’s ability to convince the bank that the business will succeed.
These are professional investors that tend to invest in start-up and smaller companies. In return, the angel acquires some control over the business. For further business advice see our article on Business Angels.
Borrowing from family and friends
It’s a common trend nowadays for new business owners to look to friends and relatives for financial support when starting a business. This is often cheaper and quicker to arrange and the repayment terms are usually more flexible than alternative sources of borrowing. Both parties need to be clear about the terms and conditions of the agreement in order not to damage personal relationships especially if the business gets into financial difficulties.
This business advice article is from Touch Financial, the Factoring specialists.