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How To Secure Funding For Your Business

Linda Whitney assesses the various ways you can secure the financial help you need to open your own business How To Secure Funding For Your Business

It’s tempting to think that you can start a business with a brilliant idea and 10 quid. But in reality, it’s usually not. Lack of money is a leading cause of small businesses going belly up.

So what do you need and how do you get it? You’ll need start-up capital to invest in any tools required and, if your business involves buying goods to sell, to pay suppliers for stock in advance.

Unless you’re keeping your job while you start up your business in your spare time, you’ll also need money to pay your bills before your business starts to generate enough to do so - this is called working capital.

Even if your business generates cash from day one, there’s no guarantee it will do so regularly enough to replace the steady income you may well have earned from a job.

Stuart Walsh, director at franchise funding consultancy Franchise Finance, who works with many startups, warns: “Under capitalisation is one of the biggest reasons businesses fail. In many cases, a few extra thousand in working capital could have saved them.”

How much do you need?

Before buying anything, work out how much capital you need, so you know whether you must raise any extra. This is an essential part of any business plan, however basic. If you haven’t got, or cannot raise, the necessary capital, you may have to postpone starting your business.

Once you know how much is needed, look at your options for raising the money. Before you invest or borrow, find out if you can get government help to get started. There is money available, if you qualify, though that tends to depend on your location and business sector.

For instance, ART Business Loans in the West Midlands offers loans from £10,000-£150,000 to small businesses and social enterprises based in the area that are unable to get all the funding they need from their bank.

You can search on http://www.gov.uk/ business-finance-support. You are more likely to be eligible for government funding if your business is in science or engineering. See http://www.greatbusiness.gov.uk.

Use your own money

This could be from savings, a legacy or gift. If you blow it all at once on the start-up, you risk having no working capital, so calculate how much you need until the business starts paying its way.

Most businesses take 18 months to two years to start paying for themselves.

Borrow from your family

This can be interest free, but family loans can distort relationships. You may want to consider getting a legal agreement drawn up specifying your payback schedule.

Business loans

The government funded Start Up Loans scheme provides access to personal loans for business purposes.

You can borrow from £500-£25,000 at a fixed rate of six per cent (as of February 2018). Applicants are assigned a business adviser who can help create a business plan, cash flow forecast and personal survival budget to submit with the loan application. If your loan is approved, you also get 12 months’ free mentoring. See http://www.startuploans.co.uk.

Alternatively, you could ask your usual bank or shop around on comparison sites to compare rates. Bear in mind that the bank will likely want you to come up with 50 per cent of the money yourself and you’ll need a formal business plan.

If you’re applying for money to start up as a franchisee, you may only have to find 30 per cent. Ask your franchisor - many have regular arrangements with banks.

For loans of over £25,000, banks will want security - usually in the form of a charge against your home, which means your home is at risk if you default on the loan repayments, so think carefully. The amount of the loan is calculated according the equity in your home, but note that this is not how much you would get if you sold it tomorrow.

Stuart says: “The banks base the value of the property on what it would fetch as a distress sale, which is less than the market value, so the equity figure is lower.”

That means you may not get as big a loan as you might expect.

Borrowing for business assets

If you need a business asset such as a bulldozer, printing press or truck, investigate asset finance, which can be used to fund fixed assets, such as vehicles and machinery.

This comes in two forms - a finance lease and an operating lease - and the tax implications of each are different, so check the position carefully. For more details see http://www.fla.org.uk.

However you choose to raise start-up funds, be sure you understand all the implications and costs involved.

Alternative sources of funds

Television shows such as Dragons’ Den mean many people are now familiar with angel investment, where a wealthy business leader invests funds in start-ups they see as promising.

It looks attractive, but Carl Reader, co-owner of Dennis & Turnbull chartered accountants and author of The Startup Coach, says: “Despite being asked about these alternative routes by most new entrepreneurs, they are not relevant to most start-ups.”

Most angels will not consider investing under £100,000. You may have also heard of venture capitalists. However, most venture capital firms will only consider lending at least six figures and want to see evidence of an existing track record of success, so this rules out many start-ups.

Peer-to-peer lending, offered on platforms such as Zopa and Funding Circle, can help you raise start-up funds from individuals, but investigate their terms carefully.

Crowd funding websites allow you to pitch for funding from large numbers of individuals. Investors will want a reward for their money, often in the form of a degree of equity in your business.

Some entrepreneurs raise funds on such sites by offering a product at a price that allows them to cover the product’s cost as well as raise extra money, so it fills their order book while also raising funds. Investigate the terms carefully with the sites. Read more like this

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