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How to finance your new business – funding advice for start-ups

If you are looking to start a new business, there is a good chance that you will need some funding to get it off the ground. Most businesses will have start-up costs, whether it’s securing premises, stock, equipment or hiring people, and they will all need paying for.

Some people might have savings, or a redundancy payment, they can use to fund their start-up, but others will need to find funds before they can launch their new business. However, as many prospective business owners find out, getting start-up finance can be difficult.

For someone who just wants to start their own business, negotiating the finance maze can be confusing and take up a lot of valuable time. So to help increase your chances of success, here are the answers to some common questions on how to fund a new business;

Q1. What financing options do start-up businesses have – and how do you decide which is right for you?

It is essential to decide what is the most appropriate form of finance required. This will depend on your type of business and what the finance is required to fund. Let’s look at a few examples;

Medium term loan or hire purchase

If, for example, a construction company needs to buy new equipment then a medium term loan or hire purchase could be suitable (hire purchase involves monthly payments to lease equipment, the equipment is “owned” once the full amount of the contract is paid) as this will allow the cost/payments for the new piece of equipment to be spread over a period of time.

Overdraft and/or invoice discounting

If, for example, a fashion retailer needs to fund the buying of stock then an overdraft could be a solution.

Invoice discounting and factoring might also be suitable. Invoice discounting is aimed at larger businesses where unpaid sales invoices are used as collateral, whilst factoring involves selling your “future sales” invoices to a third party which collects the full amount paying over a proportion to the business).

An overdraft would provide immediate funds and/or allow scope for future funds to be used for the growth of the business whilst invoice factoring/discounting will allow the business to spread the cost of the funding over time based on the future sales of the stock.

Project finance

If developing a building project – then project finance that can be drawn down at key stages should be considered as this will provide necessary funds at the specific times when it is required.

If undercapitalised – a medium term investor would be more acceptable and will provide a more sustainable way of obtaining funds than, say, short term credit solutions.

Crowdfunding

Crowdfunding is an increasingly popular form of raising finance. It can take two forms; equity crowdfunding and rewards-based crowdfunding.

Equity crowdfunding is essentially a sale of shares in the company, whilst rewards-based crowdfunding offers ‘perks’ in return for money (in other words the person doesn’t invest in the company, they ‘buy’ something) for example if it’s a new piece of tech the funders may get the very first product, before its on general release, or they may get a personalised version of the product.

Peer to Peer lending

Peer to Peer, or P2P lending as it’s frequently referred to, is another option. Here, you essentially borrow money from a group of other individuals. It has grown rapidly over recent years as businesses have grown frustrated with the reluctance of banks to lend, and savers have become disillusioned with rock-bottom interest rates.

Q2. Lenders often like to see a ‘track record’ but as a start-up I don’t have one – so what can I do to give investors similar comfort?

For businesses with a track record it is always advised that accounts should be used as a sales document, for example abbreviated accounts do not explain how you’ve operated and future plans (they’re not a sales document), whilst full accounts are a more suitable sales document.

Clearly this is something to bear in mind in the future but it is not helpful to start ups that will not have accounts to present to the potential investor.

Therefore as a minimum start-ups should have cash flow forecasts which are backed up with evidence as to why the forecast has been made.

You will also need a detailed business plan as this provides an opportunity to “sell” your business. It should include:

  • What the business does
  • Who owns the business, what are their expectations
  • Who runs the business, what is their experience
  • Who are your main competitors ( why are you better/how will you become better)
  • What are your historical results
  • What are your projected results (business plans gives more scope for outlining this than a set of accounts)
  • How are you going to achieve the results

Q3. What information is essential to provide when seeking finance, and how do I improve my chances of getting funding?

As noted above cash flow forecasts and a detailed business plan are essential when seeking finance. It is important to “sell” your business and provide as much information as possible. As a general rule always consider what your potential finance providers will need to understand, such as:

  • What’s the money for and what are the potential benefits?
  • Are the interest and capital payments affordable?
  • What security is available?
  • What are other sources of finance?
  • How will the finance provider get their money back? (perhaps by way of a loan bearing interest and security over an asset); or
  • How will an investor get a return on their investment (perhaps by way of issuing them preferential shares).

 

 

SOURCE: BYTESTART

 



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