Raising enough money to start a small business can be difficult – especially in this on-going economic downturn.
The process begins by 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 (perhaps 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. Almost certainly, you’ll need to invest some of your 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.
Following the global economic downturn, getting traditional sources of finance, such as a loan, overdraft or credit card, is tougher. 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, while 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.
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, search the j4bgrants website 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’.
Find more articles, videos and tools in the Resources box on the right.