An introduction to business financing

Finding the money to start and grow a business is a dilemma almost all small business owners face at one point or another. Some businesses can't get off the ground without a substantial investment. Others can launch with very little cash, but find they need money to pay employees and advertise if they want to expand and grow.

There are many ways to finance a business, and the best choice will depend on your personal situation and the industry you’re in. Before you start to consider financing options, create a solid business plan. As your company’s foundation, the goals and strategies outlined in your plan will help you more accurately pinpoint the financing you’ll need.

Scraping together funds to start your own venture or having more financial flexibility to invest in business expansion both require a similar amount of planning. Your business plan should answer the following questions:

  • What products or services are you offering?
  • What will you do differently?
  • How big is your potential market?
  • How will you find customers?
  • How much and how frequently will they buy?
  • How much money (realistically) can you expect to make in a given time period?
  • How much money will you need to launch the business?
  • How much money will you need to keep it going until it's profitable?
  • How long will it take to become profitable?

Keep in mind that the exact amount of money needed to start a business varies greatly depending on the type.

According to statistics, about 43 percent of businesses with employees need more than £25,000 to start, but the majority of businesses get started with less than £5,000. Take the time to thoroughly research what your start-up expenses actually are to prepare yourself and avoid unpleasant surprises down the road.

If you need a loan or will be investing a sizeable amount of your own money, borrowing from friends and family, or applying for a bank loan, you will need a more formal business plan. Software such as Palo Alto Software's LivePlan can make writing it easier. There are also small business resource organisations that can help, such as startups.co.uk or the UK Gov website.

    Here are some tips and options to consider when deciding how to finance your company:

  1. Self-finance
  2. According to research, more than half of start-ups use their personal savings to launch their businesses.

    Kelly Barker, co-founder of PREP Cosmetics, saved money years before she knew what business she'd start. Determined to leave the corporate world, she began saving £500 a month in a special account. Nine years later, when she shifted to the cosmetics business, she started putting "every penny" of her pay in the account while she studied the industry. By the time she launched PREP, she had saved over £250,000.

    Today, she and co-founder Carole Aponte, MD, sell their products through their online store, high street shops and in boutiques.

    Using existing financial resources to get a business off the ground, is also common among start-ups. Jordan Wan and Dan Zhou from CloserIQ did this by working as consultants to cover their living expenses while they were building their business.

    "We made sure to target consulting opportunities that had synergies with our company,” says Wan. “Many of those consulting clients actually turned into our first customers.”
    Not every business owner has the ability (or the patience) to save up as much money as Barker did. Also, not all businesses require such a big investment to get started or to grow, so using a credit card can help. If you find you need more startup funds, individuals with a good credit rating can sometimes get a credit card with a substantial line of credit attached.
    However, before you go this route, run the numbers and check the interest rate to ensure your potential business returns can compensate for the risk you’re taking on, and be sure to track your expenses closely so you always know your exact debt amount.

  3. Apply for a bank loan
  4. New businesses are risky, and banks are risk-averse. That’s why it can be difficult for small business owners to get a loan if their company is less than a year old or has less than a certain amount in annual sales.

    For a bank to grant a loan to a start-up, they will expect the founder(s) to:

    • have a good credit rating.
    • Have up-to-date records available.
    • Have sufficient cash flow to be able to make payments to ultimately repay the loan.
    • Be ready to put up assets (such as their homes) as security so the bank can recoup its money if the business fails.
    • Be prepared (meaning they’ve done their research to understand the application process and are well-versed on the state of their business and own financials).

    If you're becoming a franchisee of a well-known franchise with a track record of success, it may be perceived by lenders as less risky, so finding a loan may be a little easier.

  5. Investigate available loan programmes
  6. To help small businesses get financing, there are some government loans available to start-ups in the UK. If you qualify, these loan programs can help you get financing when just starting out. Have a look at the UK Gov website to see if you fit the criteria.

    You can also use this site to explore other options that may be available to you. Additionally, some franchises also offer financing programs to help new owners start their business. This information will usually be on their website and in a section of the franchise disclosure document.

  7. Research available grants
  8. The obvious benefit of a small business grant is that, unlike loans, they don’t need to be repaid. Plus, there are a number of options ranging from national, government and local grants to private (corporate sponsored). However, many business owners find it difficult to qualify for grants that will ultimately help their business. There are a few reasons for this:

    • Grants are often hard to come by. Outdated websites and clunky databases make for inefficient research.
    • They’re typically specific to certain applicants, whether it be by industry, initiative or population group (like women, minorities or young people).
    • They may also include stipulations about how funds are to be spent, whereas loans are more flexible.

    It may still be worth your time and effort if the end result could be free funding for your business. Do some online research to find grants that might be suitable. Here are some ideas to get started:

    • Search well-known websites like Gov UK or The Prince’s Trust.
    • Look for online resources that do the work for you like this list of small business grants.

  9. Seek out investors
  10. If you have an attractive business idea or plan for expansion, you may be able to enlist the help of other people’s financial resources in the form of angel investment, venture capital or crowdfunding. While angel investors usually provide a start-up or entrepreneur with a one-time investment or steady roll of funds to get their business off the ground, venture capitalists bet on the returns of both start-ups and expansion plans.

    An increasingly popular option that can’t be overlooked is crowdfunding, which is a great approach if you’re trying to streamline processes and collectively reach the masses with your idea. No matter the avenue, enlisting investors requires a well-thought out plan and some serious persuasion. Here are tips to further determine if an investor is right for your business:

    • Search angels and find the best match for your business via sites like the Angel Investment Network.
    • Familiarise yourself with some of the big venture capital firms that are known for investing in early-stage start-ups.
    • Check out popular crowdfunding sites like Indiegogo or Kickstarter. You can leverage social media and other online channels more effectively if you start a crowdfunding campaign online.

  11. Explore alternative financing options
  12. Other financing options exist, too, including borrowing from friends and family. Once a business is established and has proven sales and reasonably good credit, additional options for financing include online lenders such as Kabbage, equipment leasing, trade credit and factoring. Be sure you understand how much interest will cost you and what the loan terms are before you sign on the dotted line.

    While an unpleasant reality, many businesses will fail. It’s important to have a backup plan in case you can’t get the financing you require. Whether you’re reworking your business idea while you freelance part-time or partnering to start on a new venture, you should adjust your financial needs accordingly to best meet your business goals.

    Recap on how to set yourself up for successful business financing:

    • Solidify your business plan.
    • Determine your start-up expenses.
    • Protect your credit.
    • Save money if possible.
    • Apply for available loans.
    • Get creative with sources of income.
    • Apply for a grant if you have a targeted initiative or belong to a specific population group.
    • Seek the help of investors.
    • Work to improve your company’s worth through increased sales and maintaining good credit.

    By using this guide and taking stock of your personal finances and your business’ needs, you’ll be able to select the financing option that is best for you and your business.

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