All new businesses need some money when starting up. This may be for premises, equipment, stock or the marketing and promotion of the business. In many cases, these things are often needed before the business even starts trading, so it is important to think about where this money will come from. There will also be lots of ongoing costs for things such as utility bills and stock from suppliers and so a good cashflow is vital for any business.
First of all, you need to work out how much money your business will need to start up and operate. Read the section on Writing a Business Plan and produce some financial forecasts to establish what the business will need initially and the anticipated cashflow for the business. A good business plan will also be vital to have when approaching your bank or any other potential investors for money.
When you know exactly how much money you will need to get your business off the ground, there are a range of options for raising finance:
Your own savings or money
In the early stages of setting up a business it is likely that you will have to put a significant amount of your own cash into the business. Even if a bank or investor is willing to invest some money in your business they will normally expect you to be putting at least 50% of the money needed into the business yourself.
If you don’t have any savings that you can use then you may need to loan money from friends of family or look at other forms of borrowing such as re-mortgaging or unsecured loans. There are obviously risks with all of these options and it is worth speaking to your bank, accountant or Business Link adviser before committing to any of these options.
Borrowing from family or friends
If you don’t have savings or are not in a position to raise finance yourself, you may want to consider borrowing from family or friends. You may have family or friends who will simply lend you the money to put into the business or others may want to buy shares in the business or become involved in some way with the running of the business.
While this can be a beneficial way of financing your business, it is important to think of the strain this would put on friendships if the business does not do as well as expected and it is always advisable to get an agreement drawn up by a solicitor or financial adviser.
Many businesses will start by getting a business loan or an overdraft from a bank, although most banks will also expect that you will be able to put at least 50% of the amount needed into the business yourself.
All of the major high street banks offer some form of business banking with different offers and charges and it is worth shopping around to get the best deal. Whichever bank you approach however, they will want to see a good business plan (see section on Writing a business plan) that shows your business idea is credible and has the least possible risk for them.
In some cases, you may qualify for a government grant or other assistance to get your business off the ground. There are several schemes available that will potentially provide you with interest free loans or cash grants that don’t have to be repaid.
This type of financial support is a very cheap way of getting money into your business, but funding and grants are normally very limited and schemes often run out of funding fairly quickly. There are also often restrictions on who can apply for grants depending on location, type of industry, what you intend to use the grant for and whether your business will contribute to the local area by increasing jobs or economic wealth.
If you have a promising business idea that needs a lot of money to set up initially but should give financially attractive returns in the long term, it may be possible to attract finance from outside investors. These would normally be business angels or venture capitalists who would buy shares or a stake in the business. If the business succeeds they will share in the profits but risk losing their money if the business fails.