Starting a new business can be a whirlwind for the savviest entrepreneurs and novices alike. Excitement and enthusiasm can replace cool, collected thinking if not careful, and a number of the ‘boring but necessary’ aspects often get pushed aside. Raising finance is arguably the first thing which must be considered when setting up a new business venture and there are a number of options available depending on your circumstances. Initial considerations involve: how much finance is required; how long is finance required for; whether you are prepared to give up some kind of stake in the business for investment, amongst others.
1. Personal wealth
The most obvious starting point is at home. Do you have any savings you could make use of? There are a variety of advantages to using this approach; predominantly it avoids racking up thousands of pounds worth of debt in the process. It also means not relying on other people or methods to fund your project, leaving you feeling more accountable for the business and its long-term success. However, while being one of the safest options, it doesn’t come entirely without risk. If the business doesn’t succeed, you risk losing your hard earned savings.
If you are considering starting a new business in the next few years, it’s a good idea to start building your savings now. Look around for the best deals and set up a cash ISA or savings account which you can contribute to regularly.
Also, changes in personal circumstances can often prove good platforms to start a new business. Nest eggs such as family inheritance and redundancy pay-outs can be a useful starting point for your venture.
2. Peer lending
Another ‘safer’ option, borrowing off family and friends can be viable if you use the correct procedures. Borrowing from someone you are very close to can become complicated if not discussed thoroughly in advance. You must have extremely open discussions from the start about how you will pay the money back, what will happen if anything goes wrong and discuss contingency plans in the event the business does not work out how you expected. Agree these aspects from the outset to avoid any future disputes.
3. Apply for funding
There is an increasing number of funding options available to individuals starting up businesses. Whether you are going down the angel investment, venture capital, or government funding route, it’s essential that long-term funding requirements are considered from the outset. Advice from outside parties such as venture capital houses and private investors (or business angels) can prove invaluable; a great source of knowledge and insight. In addition, government schemes such as the Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS) and the Princes Trust Enterprise programme are becoming more available and prove a good option for many entrepreneurs.
4. Business loans
Lending from banks can be a trickier route, especially at a time where banks have strict lending criteria. Unfortunately, although small business is the backbone of the UK economy, many fail before they are off the ground as they often don’t succeed in securing a bank loan. Recent reports suggest traditional bank lending is in its fifth year of decline*. Banks will only loan money to a business based on solid, scalable ideas so it is wise to spend time developing and perfecting a comprehensive business plan. Banks are rejecting more and more proposals due to the tough economic climate so you must be prepared to outline and back up your business plan with thought and conviction.
Once you have got past this initial hurdle, there are a variety of options to choose from. Every bank will have different offerings so do your research and select the one which is most suited to your needs. Don’t be shy to ask around and meet with a number of different bank advisors to discuss what they can offer.
5. Crowd funding
One of the rarer options – crowd funding – is still a relatively new idea. Just as it sounds, it’s the process of sourcing funds from a crowd, usually strangers. In essence, a group of like-minded people donate small amounts of money to one central cause. Initially, it was used for community and charity projects but it is now gaining momentum in the business community.
It’s seen as a more democratic way of funding as it bypasses the banks and in a time where bank lending is low, it’s a viable option for some businesses.
Seeking professional advice is always recommended when starting up a new business. Derek Armstrong assists new and small companies in developing business plans, raising finance and applying for funding – email@example.com – 01942 292524.