Raising enough money to start a small business can be difficult. The process begins with working out your start-up and operating costs for the year, which you can compare against anticipated sales. Even with a reasonably healthy turnover, your business might have to operate at a loss for a while, which means your borrowing requirements will be greater.
Once you know how much money you need (plus a bit more for unexpected expenses), you can consider how you can raise the money you need.
Many people use personal savings to start their business. Others use redundancy money or raise funds by selling assets, such as shares, or by 'down-sizing'. However you raise the money, you will almost certainly need to invest some of your own money if you’re to attract funding from others.
Borrowing start-up funds from friends and family is a tried and tested option, but they should only invest money they can afford to lose. If the business fails, relationships can become irreversibly damaged.
Legal agreements signed by both parties are recommended: then everyone knows where they stand. Some friends and family members might be willing to provide an interest-free loan, while others will expect to profit, either through money or part ownership. You must weigh up the possible long-term consequences of conceding equity.
In the past, providing you had invested your own money, could provide security and had a sound business plan/model, most high street banks would provide start-up funding, through credit or a loan.
However, traditional sources of finance, such as loans, overdrafts or credit cards, have become more difficult to access and you will face a rigourous application process to ensure you can meet your repayments. Find out from your bank what financial advice and assistance they provide to people starting businesses.
Some people have started businesses by remortgaging their homes. This can be less expensive than a loan, as payments can be spread over a longer term. However, the mortgage market has also tightened up dramatically, while many people are understandably uncomfortable at the prospect of putting their homes on the line. Make sure you understand the full implications of any money you borrow, especially if you are asked to provide security.
Most start-ups won’t be of interest to investors such as ‘business angels’ or venture capitalists/private equity firms as they will be looking for a higher return on investment and an exit plan.
Crowd funding has proved another funding option for a growing number of small businesses and start-ups. Crowd funding enables groups of investors to come together to fund businesses looking for investment. Each investor pledges a small amount in return for a stake in the business, return on their investment or another benefit (eg discount on products or services). There is a growing number of crowd funding platforms and they each operate in slightly different ways. Carefully research their criteria and the implications for your new business.
Grants are usually only available to specific types of people or businesses, often in economically disadvantaged places. Sometimes match funding can be required. For further information about grants, speak to your local Enterprise Agency or use the Business finance and support finder.
If you can’t raise enough money to start your business, try to reduce your costs. You might even have to change tack, for example, you could launch and try to establish your business on a part-time basis while working for someone else.
Banks and others are likely to have well-founded reasons for refusing to lend you money, so be prepared to reconsider your idea for a business if you’re met with a polite but firm ‘No’.
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