An Intro to Your Finance Options

As if starting a business wasn’t scary enough.  If you need to obtain finance to enable your business to get going – or if you’re an existing business owner and need finance in order to expand – this can make life even scarier!

Now, before I go any further, I need to make it clear that I am not a financial adviser, nor am I qualified to offer financial advice.  I am able however to give you some solid things to think about, to help you explore your options and to help you prepare to apply for finance.

Before you do anything else you need to make sure that your business plan and marketing strategy are both completely up to scratch.  If you haven’t got one or other of these then now’s the time to get on it!  You’re going to need both of those – and all of the information within them in your application.

There are downsides to each and every type of finance and obviously getting finance of any type is a risk both to you personally, and to your business.

Once you’re confident that you’ve got your business plan and marketing strategy in place there are some other questions you really need to ask yourself before you start speaking to any lenders.

1)  Have you fully researched your business concept?  You need to be incredibly confident that your business has legs before getting any finance and you’ll need to be able to provide solid evidence to any potential lender or investor.

2)  How will you make the repayments on the debt until your business can afford to pay for it?  It’s a common catch 22.  You need the money to be able to start or expand your business but you need your business to get off the ground (or get bigger) before you can afford to make the payments on the debt!  Unless you can afford to make the payments through your savings or other income into your household you may need to consider running the launch of your new company alongside any existing job you have, or maybe doing some freelance work.

3)  How much do you really need?  Borrow too much and you’ll end up paying more interest than you need to.  Borrow too little and you may find you end up having to find more finance…or worse…shelve your project half way in!

4)  Do you need short term or long term funding?  If it’s just for day to day needs then something like an overdraft is possibly all you need.  If the finance is to purchase property or equipment then long term funding may be more suitable.

The Application Process

With all that out the way it’s time to consider the application process and the types of finance that are available.  Whatever type of funding you go for, there are going to be lots of questions asked about you and your business.  Being prepared for these – as well as being armed with a kick-ass business plan and marketing strategy is going to stand you in much better stead for being successful in getting the funding you want.  It’s worth knowing the answers to the following as a very minimum:

1) What does your business offer?  How will you set yourself apart from your competitors?

2) Why do you want the money?  What will you use the money for?

3) How much are you personally putting into the business?

4) How much do you need to borrow?

5) How and when do you plan to repay it?

6) Do you have any security?

Funding Options

Self Funding

This is the simplest option – start off small using your savings, investments and/or assets.  You’ll avoid costly loan fees and interest charges (unless you decide to remortgage) and you’d get to keep all the profits from your business.  The downside is that you’d have less or nothing in reserve ‘for a rainy day’ and if you do remortgage then you are potentially putting your house at risk.

Family or Friends

If you’re lucky enough to have some family or friends who have sufficient funds to back you in your venture then this could be an option for you.  Chances are that you’d get far better terms than a bank would give you but this can be a tricky one.  The saying goes ‘never work with friends or family’ for a reason!  You need to consider what you’d do if you needed to give them their money back in full before you’d completed the repayments.  It may also be a huge test of your relationship with them – especially if the agreement meant that they could then contribute to the direction of the company.  Consider carefully whether the relationship is strong enough – to stand up to these challenges.  If you do decide that this is the route for you, no matter how close the relationship – be sure to have formal contracts drawn up as this will ensure all parties understand what they’re agreeing to.

Grants & Start up Finance Schemes

Depending on you and the type of business that you have, you may be eligible for a grant.  For example, The Princes Trust Enterprise Programme offers grants for young adults aged 18 to 30 to set up in business with grants and low interest loans. There are also many other organisations out there, both government funded and private that provide financial support to start-ups.  The application process for grants is often long and very time consuming and generally you won’t get enough money to cover everything you need but you won’t have to pay it back so it’s certainly something to consider.  Have a look at the government’s ‘business finance support finder’ tool to see if you might qualify for any of their funding.  For many new start ups, a Start up loan is a good option – generally you do need to have been in business for less than a year to qualify.

Bank Loans

A bank loan for your company will be just like any other loan.  You’ll have a specific amount to pay back each month and you’ll incur interest charges….plus additional fees for any late payments.  On the plus side, you don’t have to give the bank any share of your profit.  Unfortunately though, banks don’t like to lend to start-ups with no track record and interest rates can be quite steep if they do decide to lend.

Investment Angels

Think Dragon’s Den….  An investment angel is a company that is willing to invest a large sum of money (£10k+) in return for a stake in your company (often 20 to 25%).  Find the right person and it could be a dream come true with support from someone with huge knowledge and experience.  They may also have extremely valuable connections that could benefit you.  The downside however is that you have to give up a share in your business and may be under pressure from the investor to sell at some point in the future.

Invoice Finance & Factoring

Basically a service provider pays you for your billed invoices whilst you’re waiting to be paid them.  This enables you to access working capital that would otherwise be tied up in invoices.  The companies that provide this service do of course charge a percentage of the invoice in return but as cash-flow can be one of the biggest hurdles for small businesses, invoice financing can plug a gap.  Another downside is that the factoring company will chase the company for the debt which could potentially damage your relationship with them.

Online Lenders

Similar to banks but the application process is generally much faster and as the lending criteria is often different to that of banks, start-ups have a better chance of securing funding.  Funding Circle and Assetz Capital both specifically offer finance for businesses.  Interest rates are generally better than traditional banks and are usually fixed for the duration of the loan however lending periods are usually quite short 3-5 years.

Crowdfunding

This is a relatively new method of obtaining funding for your business.  A growing number of people are prepared to donate, or invest, in start-ups via an online platform.  Because people can give or lend from as little as £5, the industry is more accessible than traditional forms of angel investing.  You will have to convince ‘the crowd’ that your project is worth investing their cash into but if you can manage it then this can be one of the easiest ways to attract investment.  The main risk with this is that it is potentially a lot of work with possibly little or no pay-off.

If you need any more help on this, or anything at all to start your business, don’t hesitate to get in touch for a chat.

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