Starting a business is full of many challenges, and how to finance your new idea to make it a reality is a very important one.
The right financing will help you to ensure you have the funding needed to get your business up and running, and cover the essentials until you start making money.
If you are unsure where to start, we have put together some important things to consider when working out how much money you are going to need and the different types of finance available to startups.
How much do you need?
To work out how much money you are going to need, start off by drawing up a budget based on your business plan.
Show your forecasts for sales and expenditure, and include any fixed costs, such as purchasing equipment.
Try to be realistic when setting your budget. Sales may turn out to be lower than expected at first and it might take longer to get paid.
When will you need it?
It’s not uncommon for a startup business to spend more than it earns for the first 2-3 years, meaning the amount of financing you need may continue to increase long after you break even.
Think about any seasonal trends – for example, will your business receive most of its income during the summer months? Will your outgoings be higher in the months leading up to Christmas?
Don’t wait until you are desperate for extra funds and make sure you allow for some contingency funding to cover any unexpected problems that may arise.
Work with your bank
Before lending any money, your bank will want to see a viable business plan which must include a comprehensive budget. They will be able to advise what information is required and how figures should be presented when seeking a loan.
Make sure you understand the importance of credit scoring, how it works and what you can do to ensure the best score possible, both for yourself and your business. Depending on your credit score, you may find that some sources of funding are more easy to secure than others.
Which type of funding is most suitable?
Once you have decided how much funding you need to get your business up and running, it’s time to think about what type of funding is best.
Potential sources of finance include your own savings, friends and family, as well as other investors.
It could be difficult to borrow money from the bank if you can’t point to an adequate initial sum that you have invested into the business.
When it comes to short-term borrowing, an overdraft can be the best way of funding working capital. You will only pay interest on the amount you are overdrawn by each day. However, going over your overdraft limit will incur bank charges and high interest rates which could result in the bank bouncing your cheques, damaging your credit with suppliers.
You should only try to save money by relying on overdraft finance if your cash flow is healthy and robust.
Let your bank know in advance if you think you will miss a loan repayment or exceed your agreed overdraft limit.
Loans and other forms of borrowing are usually the best way to finance equipment, vehicles and long-term borrowing requirements. Most loans are for a fixed period of between one – ten years. The term of any loan should be shorter than the expected life of the asset you are acquiring. For example, if you are buying leased premises, the mortgage must be repaid before the lease ends.
Consider leasing equipment that you do not need to own. Instead of buying the item, you rent it for a fixed period (usually three to five years). Payments are spread out over the period, helping your cash flow. You might get the option to purchase the equipment at the end of the lease period.
There is a range of schemes that provide help and finance to start-ups and small businesses. Central and local government, business support organisations, some trade associations and charities all offer assistance.
A financial investment such as stock or bonds could pay interest enabling you to lend money to the business.
You may want to consider taking out a mortgage on your personal property, as mortgage rates are lower than business lending rates. Beware that your home will be at risk if your business fails and you can no longer make the mortgage payments.
Could you ask family and friends to invest? Show them your business plan and give them time to think it over.
Outside investors may be an option but you will need to show a strong track record, credible business plan and be prepared to give up a share of your business.
Crowdfunding is becoming increasingly popular and allows groups of interested investors to put together to each invest a small amount in the business.
If you have any questions on funding your start-up, speak to your accountant.