How to Fund a Start-up! 8 Tips

As I am in the fortunate position of working for a business finance provider, I chose to ask a few of the consultants in the office with what finance options are available for start-ups and what they usually advice start-ups to do.

Initially they told me that the term “start-up finance” always suggests a larger challenge than normal when it comes to sourcing finance.

“Sourcing finance for a business with little or no trading history and only a business plan to go on is one of the most difficult challenges out there.”

However, the consultants also told me that funding a start-up CAN be done, if the owner understands what options are available to them and takes action on this knowledge.

Bank loans, government schemes, trade finance, factoring, invoice discounting and other flexible finance products are all useful for financing a start-up. I have highlighted some of the key options available, however researching these products goes beyond simply reading this article; by speaking to a finance advisor such as at Touch Financial or asking a qualified accountant you will be able to find the best  solution which fits your business needs. Read on for an overview of the finance methods available so you can figure out what solutions are worth looking into further.

Tip 1: Start with what you already have   

You may be amazed at the level of finance you can raise through your own efforts. Whether it’s taking on a part-time job, living a simpler lifestyles (stripping out things such as iPads, designer clothes and meals out) or finding people who are willing to pay for other skills you possess. Look realistically at your life and what you can do to make the most out of your current assets and skills.

Tip 2: Bank Loans

It is possible that you have thought about trying to secure a bank loan. It is a good idea to always try the banks as they will be able to help you out by questioning your business plan and making sense of what you are proposing will be a successful business.

Whilst the majority of banks will demand a strong business plan, 12 months of trading and want to know what experience you have connected with the market you want to get involved with, a bank may consider you.

Tip 3: Government Loans

The second option which we are likely to point you towards if you do not qualify for a bank loan is to look into government funding. The Enterprise Finance Guarantee Scheme aims to help small and medium sized businesses secure loans which they may not have been able to directly from a bank. For information you will want to follow that link but generally, one fifth of the businesses who acquire a loan through the scheme are start-ups. Make sure you keep up to date with the latest Government schemes for small businesses as they are often bringing out new methods of funding help – following them on twitter @bisgovuk should be enough although most schemes make the news anyway.

Tip 4: Trade Finance

There a few specialist commercial finance products available and trade finance is one of them. This will only concern those who will be setting up a business importing and exporting in or out of the country. You will receive payments upfront and benefit from experts at trading overseas as they ensure your cashflow is kept healthy and business feasible.

Tip 5: Invoice Finance

A second alternative form of funding is invoice finance. Although this can be split in a few different products, a start-up would likely only be interested in factoring and spot factoring – invoice discounting products would come later on in the business’ life.

Factoring could be a possible form of funding for your start-up if you have already got a few orders from customers that you are planning on allowing credit terms too. If you have a customer that you have given 60 days to pay for the service or product of your business you will be able to receive a cash advance of the invoice involved often within 24 hours of invoice creation. This means you have the cash to provide the service or product you are about to provide. You can use this type of cash advance for anything, whether it’s to pay rent you owe, purchase the raw materials of your product or simply to maintain a healthy cashflow. This often works well for recruitment, courier and printing services although can usually be tailored to any start-up that plans to sell invoices on credit.

Spot factoring is the same in principle to a full blown factoring facility but instead factoring each invoice created, it is a pay-as-you-go equivalent. You pick and choose which invoices you take a cash advance against which makes it useful for funding particularly large contracts. Construction companies often take up this approach as they can often have problems funding a large project (wages, raw materials etc.) as they only get paid once the project is complete. Rather than being tied in for a year (for example) you can dip in and dip out as of when you feel you need the money.

Although factoring and spot factoring are business-to-business (B2B) facilities, a product called Business Cash Advance uses the customer credit card sales which you have forecasted as the asset to secure a cash advance. The downside to this is that you have to meet a few particular requirements which include at least 6 months of credit card sales to be considered – this could still be a possible solution for later though.

Tip 6: Skill Swaps

Skill swap is a relatively new phenomenon which allows you to swap products or services for other products or services. For instance, you may be fantastic at writing in a tone which doesn’t scare potential leads away, whilst your friend has a skill in website design and development. You can strike a deal where you write the content for his and your own site whilst he designs and develops some great looking websites to hold the content. This costs neither of your money, helps you develop your skills and is often a good way to avoid having to pay and manage external agencies.

Tip 7: Cut your future costs through DIY

We have already discussed stripping down your personal life-style, but how about being smart about what you spend the money you do raise on. For instance, moving on from the skill swap idea of asking your friends to help make you a website, why not learn to make it yourself? WordPress is a very simple and easy to use website creator which can be personalised to a high degree with little coding knowledge. Read “How to build a company website on a budget”. You may also want to look into:

  • Completing your own accounting – although make sure you do not cut any corners, get advice when you need it.
  • Performing your own marketing – personal networks, going out and connecting with people.
  • Being your own sales generator buy again, using your own network to your advantage or even encouraging references from friends, family and those clients you have a good relationship with to spread the word of your new venture – it beats paying for ads.

Tip 8: Business Angels

We have all seen or at least heard of BBC’s Dragons Den by now. Business angels are individual investors of a business and may consider financing your own start-up. However, just as with the experience of the Dragons from Dragons Den, it is likely an investment from an angel will come with high demands and potentially significant slice of your business.

Touch Financial are the UK’s largest invoice finance provider and supplier of all commercial finance products. To get in contact with an expert for a no obligation, confidential quote on what we can do for your start-up or small business, call us today on 0845 388 9725.

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