Financing a Start-up Company

You’ve got a brilliant business idea. You’ve talked it through with your friends and family, and they also think it’s great.  You do your market research, create a business plan and cash-flow projection and worked out how you’re going to live on bread and water for 6 months to make it work. Now you just need to raise the finance!!

 

Sadly, having gone through all the time and effort to put together what you think is a great business idea, financing it is always the most difficult part. Basically there are 3 or 4 options:

  1. Self fund it.
  2. Get a bank loan
  3. Attract external investors
  4. Apply for a grant

Self financing a Start-up Company

This option is rarely open to many people. Self funding means just that – using savings, or your own investments to pay for the business during its start-up phase when it is likely to be making no money, and realistically a loss. With a typical start-up not making a profit for the first year at least, this can mean a huge drain on your savings and investments and is the highest risk approach.

Using a bank loan to finance a Start-up Company

This approach is the one favoured by many, but since the economic downturn the banks are far less likely to lend money to new businesses as they once were. To succeed in getting a bank loan, you must have a watertight business plan, probably warm business leads already to bring income in and also require some cash to inject into the company yourself.  The UK government will back up to 80% of a business loan under the EFG (Enterprise Finance Guarantee) but this by no means guarantees that you will succeed in getting one.

If you are turned down by a bank, don’t write it off – visit different banks to see if the”y can offer a loan.  Different banking groups have different loan criteria so where one says no, another may say yes!

Typically, bank loans for start-up companies are made over a minimum of 2 years, so its essential that the financial planning in your business plan caters for this.

If you are unable to raise the full amount that you need via the bank, there are also other alternatives…

Attracting External Investors to Finance a start-up

Using external investors can cover a range of different scenarios. Friends or family may be willing to loan you the money, possibly in exchange for some shares in the business or just with an agreement for regular repayments much as you would with a bank loan.

Finance can also be raised externally from professional investors or “business angels” who look to invest their own money in start-ups that will give them a good return on investment in a relatively short period of time.

Business Angels may wish to have an involvement with running the company and will typically want an exit within a set period of time.

If you are going to get any type of business investment that involves giving a share of your company to others, make sure you get sound independent legal advice beforehand to ensure you don’t get in a mess further down the line.

Apply for a Grant to finance a startup

Finally, depending upon your local area and nature of business amongst other factors, a grant may be available to assist in financing the business start-up.  This could range from reduced rent payments, to money towards buying equipment. There are various grant schemes in each area – your local council should be able to advise who to contact.

 

When financing a start-up company, it will often be the case where you need to find funding from one or more of the above places. If you can manage to do this, then thats when the hard work and fun really starts!

 

Edit:  I’ve now started a UK Business Grants and Funding list

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