Financing your Business

By: Andy Berrow, Business Link
17-Nov-2009

All new business ventures require capital to enable them to buy equipment, acquire premises, unless starting up from home, and to enable the marketing drive to announce to prospective customers that they are open for business. 

Once started they need more funds to keep them going, not just until sales take place but until they actually get paid for what they have done. This could take several months depending on the activity they are doing and any credit terms they have agreed with their customers.

There are a number of different ways that the need for these different types of finance can be satisfied and making the right decisions on these can really make a difference to business success. Options include using their own or family money, bank or other types of borrowing and third party investment. In some circumstances there may be some help available by way of grant or subsidy.

The first thing that needs to be worked out is how much money they need to raise. Many people do this by writing a business plan to formulate their ideas on paper and then to calculate, in line with assumptions using budgets and cash flows, how much cash they require.

It is often useful, at this stage to take some advice both on the format and content of the business plan. Business Link, with its staff of experienced advisers and highly informative web site www.businesslink.gov.uk/london is uniquely positioned to help with this task.

If cash is to be raised by way of a bank or outside investor, they too will want to be satisfied that the business idea will generate sufficient profits to repay them over a period. The business plan, therefore, will need to demonstrate this as well as giving information on the owners, and their management team where applicable, experience and ability in their chosen sector. It should also explain how they intend to let their potential customers know about them and their products and services so that sales will ultimately take place.

It is important that when preparing the financial projections allowance is made for the amount that will need to drawn out of the business to cover immediate living expenses.  Also bear in mind that in the early days of the business cash may be scarce so any areas where expense can be reduced in the short term should be explored thoroughly. This could include working from home rather than renting office space, leasing or borrowing equipment rather than buying it and getting more than one quote for printing of business cards, advertising material etc. It is tempting to produce this sort of collateral using an office computer and printer but if the end result does not portray the business in the correct manner this may be a false economy.

The type of finance needed is largely dictated by what it will be used for. If it is needed to buy company vehicles, for example, then some sort of loan that will be repaid well before the end of the useful life of the vehicle would be appropriate. It is also worth looking into other options such as leasing or hire purchase since although these may be more expensive they can reduce the amount of cash that is spent in the early days of setting up the business.

Using some of the entrepreneurs' own money will demonstrate to any bank, or other investor that they truly believe in the future success of the enterprise since they are prepared to take some of the risk. Investors, of any sort, are very unlikely to be willing to take all of the risk themselves.
Bank overdrafts should be used to cover the timing differences between receipts and payments and not to purchase machinery or other capital items. If used in this way the bank account will regularly fluctuate between credit and debit and the bank will be content.

If the business idea requires substantial funding then exploring the concept of inviting investors to buy shares in the company may be applicable. Usually putting in more than £10,000 these "angel" investors will, again, want to be persuaded via written plans that they will make a good return on their investment, usually looking to sell out their shares within a five to ten year period.

If the business is to be set up in a designated deprived area then it may be eligible for some grant support or attract finance from a community development finance institution.

In practice most businesses use a combination of sources of finance to satisfy their funding needs. If guidance is required on the types of finance, and their appropriate use, then professional advice should be taken from sources such as banks, accountants and, of course, Business Link.


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Contact details for Business Link enquiries are:

Phone - 0845 6000 787
Web site - www. businesslink.gov.uk/london