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Funding Your Business

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There are several ways to fund a business. You may have sufficient savings to cover the startup costs, you can borrow funds from the bank or family or you can look for an investor. Keeping startup costs to a minimum is nearly always the best option and the lean startup is the most popular way to start a business in the current environment.

Introduction

Every business requires funds to get started, and there is a range of options out there for you to take advantage of. What’s available will depend on how much you need, the type of business you’re planning to run, and the level of control you want to keep, but essentially funding comes as four types:

• Your own investment

• Investment from others

• Bank Finance

Many companies mix and match their funding sources, an overdraft to cover day-to-day borrowing, a loan to buy equipment, and investment to provide a substantial amount to get the company up and running.

Personal investment

Most start-ups involve some personal investment, especially as it can be difficult to attract further funding unless you’re prepared to put your own money into the business. You might want to use savings, an inheritance, a redundancy payoff, or money from re-mortgaging your home. While borrowing on credit cards and unsecured personal loans are also options, these tend to be more expensive and are not recommended as a solid foundation for a new start-up.

"Putting up your own cash gives you independence"

The advantage of putting up your own cash is the independence it gives you – lenders or investors may expect a say in how you run your business; they’ll certainly want a good return for their investment, and they can decide to withdraw their support at any time.

The downside is that if the business doesn’t work out, you could be left with nothing. If you’ve re-mortgaged, you may face large monthly repayments or be at risk of losing your home. You may end up paying interest on other loans for many years, while repayments on credit cards, if you use this option, can be very expensive.

Funding from family and friends

Asking those closest to you for financial help is often an option in the early days, especially if your startup is too small to tempt investors or banks.

Gratifyingly, family and friends are often less demanding than banks and investors, offering interest-free or low-interest loans.

They could be willing to accept your back-of-an-envelope idea in lieu of a formal business plan.

They may also trust you to get on with the business without their input.

However, it’s important that you explain the risks to them, as well as your goals for the business. Ask them to contribute only as much as they can comfortably afford.

It’s best to put any agreement in writing to avoid potential fallouts later. You’ll need to be clear whether they are offering you a loan that will be paid back or an investment in return for a share of the business. You should ask a financial advisor or solicitor for advice, and then draw up an agreement. This should cover issues such as interest and repayment terms, possible shareholder voting rights, and what happens should your investor want to exit the deal. A few principles agreed on a sheet of paper could save considerable heartache in the future.

Overdrafts and loans

Banks are often the first port of call for additional finance.

You can borrow money in a variety of means including overdrafts, loans, asset and invoice financing, but first you’ll need to show the bank that you’re a good risk.

A comprehensive business plan is essential and on many occasions security (business or personal assets) is asked for.

It’s desirable to show you have a good track record in business and that you’re investing some of your own money (or that of an investor) in your idea.

Bear in mind that you may have to pay an arrangement fee in addition to interest on the amount you borrow.

"You can raise additional finance in a variety of means from banks"

Loans can be a flexible way to finance some of your startup costs. You might borrow £1000 or £100,000 and pay it back over two years or twenty. You can budget for your repayments and may be able to take a repayment holiday, during which you pay only the interest on the amount you owe. It is sensible to look around for a deal and interest payments that suit you. However, you may find that regular loan repayments cause you cashflow problems, or that you are paying interest on money you’re not using.

Overdrafts can provide a fallback that helps to fund everyday expenses. They often have higher interest rates than loans, but the advantage is that you pay only on the money you have overdrawn. Banks can ask for repayment of the overdraft at any time, so look for a commitment or guarantee, where possible, for the term of your overdraft. This gives you the confidence that it’ll be there as and when you need it for the period you’ve agreed.

Business angels and venture capitalists

If you’re looking for funding of more than £10,000 for your business, an ”angel” may be the answer to your requirements. Business angels are wealthy individuals that invest capital in start-ups in return for shares in the business. In addition to cash, they can offer their valuable expertise.

"Business angels and venture capitalists may be the answer to your funding requirements"

Venture capitalists invest substantial sums in high-risk businesses or those that have the potential to generate substantial amounts of money in the longer term. They tend to expect a big say in how the business is run, and set targets that must be met before each stage of funding is released.

Either of these options will mean relinquishing a certain amount of control – and profits – in your company, but a venture capitalist may be an attractive option if you don’t expect to produce much cash at first. Unlike banks, which typically expect immediate payments on a loan or overdraft unless payment holidays are agreed upfront, outside investors don’t usually expect to see money back until the business can afford to pay it. It is important to make sure that you understand the terms of repayment upfront so that you can be confident and clear about what you’re aiming for.

Crowdfunding

A new and fast growing way to fund your business is through various crowfdfinding sites like kickstarter.com. Such platforms allow a wide array of individuals to fund all sorts of projects and businesses around the world. The typical amounts funded could be as little as a few pounds and as high as tens of thousands of pounds. Each site has different policies and different criteria of how you give the money back. In many business, you often give back by providing a free version of your product or a special access to your product and company. It should be noted however that crowdfunding schemes may not be available to Channel Islands residents at this moment in time.

For more information on companies that provide Finance and Funding take a look at our Business Directory.

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