You’ve got a business idea but now the question is how do you turn it into reality? How you fund your business will be one of the key considerations. Whether it’s to buy equipment, purchase stock, or advertise your offering, at some point you’re going to need to spend some money. In most cases, that’ll mean turning to external sources – such as banks and start up business grants - for financial assistance.
However, for new business owners obtaining funding can be difficult for that very fact – you’re a new business owner. We’re going to look at the different options and factors you’ll need to consider when funding your new business idea.
What funds will I need to launch my business idea?
How much money you’ll need to launch will depend on the nature of your business idea. Some business ventures have minimal overheads and may just require a laptop and an internet connection. An accountancy business, for example, would fall into this camp. The outlay for software and hardware certainly needs to be factored but, generally speaking, funding shouldn’t be a blocker.
At the other end of the spectrum, your business may need a significant financial investment in order to get up and running. A manufacturing business, for example, may require expensive machinery and tools, as well as access to a dedicated factory or workshop site.
Planning is essential
Whatever business you’re planning to launch, you need to be clear from the outset how much money you’ll need both for your initial requirements and initial trading. The best way to evaluate your requirements is to write a detailed business plan. Here are some of the initial start up costs you’ll need to scope out during the planning phase:
- Deposits (rent etc.)
- Initial stocks
- Borrowing costs
Speaking to an accountant with a start up business specialism is a good move – as it’s likely they’ll have worked with similar clients and can provide useful pointers on how much money you’ll need.
Launch with minimum investment
A general rule of thumb when starting out is to keep your financial investments to the minimum. With money hard to come by, this is partly through necessity. However, even if you do have funds to spend, it’s more prudent to test the waters with a scaled back launch, thereby minimising your financial exposure if things don’t work out.
Part of your business planning should involve working out what a minimum viable product/service looks like. For example, if you’re launching an e-commerce business you might decide to start off with a limited product range. Going even further, you might determine that selling these products through an online marketplace such as eBay or Amazon will provide a quicker and cheaper route to market – and allow you to gauge demand before investing further.
The counter point to this is that any product or service launch will still need to deliver on customer expectations. Cutting corners and costs at the expense of your customers will ultimately harm your reputation – and potentially worse if it leads to physical or financial harm.
Raising funds without going to the bank
Loading your business with debt before you’ve even started trading is generally to be avoided. Plus, there’s the difficulty in obtaining funds from lenders (more on that later). So, raising funds yourself is the logical place to start:
- Using your own money – You may be able to fund your start up through savings, a redundancy payment, an inheritance, or by using your retirement funds. If you’ve got any valuable assets, such as jewellery, or a luxury watch or car, you could get an asset-based loan.
- Borrowing from friends and family – Mixing business with friendship might not seem like a sensible idea but plenty of people raise funds this way. You’re much more likely to get favourable terms for repayment but you do risk the relationship turning sour if things don’t work out.
The more you’re self-reliant, the better your story will be to investors later down the line. How can you expect others to invest in your business if you’ve been unwilling to do the same?
Leasing and hire purchase can be a good option
Instead of having to get a loan, or waiting until you’ve earned enough money to buy something, you could use hire purchase or leasing.
With hire purchase, you put down an initial deposit and then pay the rest in regular instalments. After the last payment, the equipment becomes yours.
With leasing you make fixed monthly payments. At the end of the lease period you won’t own the equipment or vehicle, but typically you’ll be offered the opportunity to pay a sum to purchase it, to continue the lease, or simply stop it. In the long-run it may workout more expensive than paying for it outright. It can also be difficult to get out of a lease once it’s been signed, and you may have to be VAT registered. But there also advantages, such as:
- It enables you to get something you might otherwise not have been able to afford
- You can get the latest model
- For many leases, if the equipment or vehicle breaks down the finance company has to pay for its repair not you
- It’s not counted as a loan so it doesn’t affect your ability to get loans.
Can I obtain business funding through my bank?
Despite your best efforts to raise funds on your own, you may need to turn to commercial lenders for financial support. As we’ve already mentioned, start up businesses can struggle when approaching banks for funding. Banks are naturally wary of fronting funds for untested businesses. However, there have been government initiatives to encourage business lending in recent years.
Firstly, your business bank account may have an overdraft facility. This can be a useful buffer in the short term but not a permanent source of finance.
A longer-term approach would be to take out a business loan. When you approach a bank for a loan:
- Ensure you have a thorough business plan outlining how much and why you need the money. You’ll need to detail how you plan to spend it and the forecasted returns. Be prepared for your figures to be scrutinised.
- Don’t present your business idea as fool proof – lenders prefer to deal with people who are realistic rather than naively optimistic, so identify risks and explain how you will manage them.
- Practise what you’re going to say beforehand, for example by having a dry run with a friend.
The other possibility is you use your personal credit facilities to finance your business, whether that’s a credit card or personal loan. Some business owners will do this to start out with as they are unable to secure funding against the business and are willing to accept the personal liability. Needless to say, it’s a risky manoeuvre as the debt can quickly mount and your business may not make enough money to pay it back.
Could I get a Start Up Loan?
Applying for a government-backed Start Up Loan is a decent option. Aimed at start up businesses who’ve been trading for less than two years, the Start Up Loan scheme allows you to borrow up to £25,000 at a fixed rate of 6% p.a (the average loan amount is £7,500).
Similar to applying for bank loan, you’ll need to have a detailed business plan outlining your figures including a cash flow forecast.
If you are approved, you’ll also gain access to lots of helpful resources including a dedicated mentor.
Crowdfunding and angel investors
Crowdfunding sites like Kickstarter and Crowdcube offer an alternative route for start up businesses to raise funds. These platforms allow you to pitch your business to investors and raise finance through peer-to-peer lending. In exchange you may offer equity, a reward, or interest returned on top of money they lend.
The terms are often more favourable than raising finance through your bank but actually getting the visibility to raise enough money is difficult. Crowdfunding tends to work well for start up businesses that are geared around a unique and compelling idea that can generate excitement for investors.
The same can be said for angel investors. Business angels are people who look to invest in a business in return for getting a share of it. Only limited companies can sell shares, so this way of raising finance is not open to sole traders or partnerships.
To attract a business angel, you’ll need to have a solid business plan and be able to convince them your business has the potential for high growth. You’ll also need to demonstrate that you have the skills and drive to make a success of things.