Start-up funding advice

By: Sadie Hopkins

Date: 23 June 2010

Starting your first business can be a daunting task and raising finance can often seem impossible. So what are your main options?

1 Savings and self-finance

Start putting money aside soon as you can. If your long-term aim is to start a business, cut down on your spending and save as much as you can from your current wages. I moved in with my parents, paid a much lower rent and saved hard to ensure I had as much money as possible before starting my first business.

Cash in any ISA’s or savings accounts. If your business is successful, you may get a much greater return on your money than you currently get, with interest rates as low as they are.

2 Loans

If you have no capital, it is difficult to get finance, especially post credit crunch and with no trading history. Banks require a detailed business plan, preferably with three years projected forecasting and profit/loss models.

However, as interest rates are currently low, a business loan can be a reasonably cheap to borrow. The new Enterprise Finance Guarantee (which has replaced the Small Firms Loan Guarantee Scheme) is useful for start-ups with no capital. Under the scheme, the Government guarantees 75 per cent of the loan should the business be unsuccessful. The EFG is available for businesses with a turnover of less than £25m and offers loans up to £1m. If you borrow under this scheme, you will have to pay a set-up fee, plus a quarterly fee for the borrowing.

Shop around for the best deal on any bank loans – interest rates can vary dramatically. With my original business loan, I naively accepted the first one I was offered (at an extortionate rate) as I was convinced I would not be offered another. Six months later I approached a second bank and moved it, saving me 5 per cent interest.

3 Investors – family and friends

It can be worth approaching family and friends to see if they will invest in your new venture.  Discuss various levels of involvement; some may expect a share of your profits, while not wanting involvement in the running of the business (a silent partner). Others may be happy to lend long term, receiving only interest payments, as does one of my investors.

Whatever the situation, always make sure both parties take independent legal advice and draw up an agreement outlining the terms. This prevents any potential problems if the future relationship breaks down.

4 Investors – business angels or venture capitalists?

Look for financial involvement from established business people, either in the form of a business angel (ie a local businessperson who lends money to businesses) or a private equity provider (ie usually more suitable for larger businesses with higher turnovers). Both can provide a wealth of information and assistance, especially if they have relevant contacts. In return, they will expect a share of profits and possibly a share of the equity.

Be cautious about giving away too much control over your business. You must also find an investor that is right for you and the business – having a good working relationship is a must. If you feel this is unachievable, don’t take the risk.

5 Grants

Whilst notoriously difficult to gain Government or EU funded grants, it’s worth making enquiries in your local area to see if you are eligible for help. The EU has a wealth of grants available, especially in rural areas, but they are badly advertised and difficult to access.

The Princes Trust is useful to young people starting up a small business, but the loans offered are fairly small and the criteria strict – although they are helpful for people from disadvantaged backgrounds.

If you are restoring an older property as part of your business, see if you are eligible for support from the local council, English Heritage or local conservation trusts.

6 Reducing Costs

It pays to keep your start-up costs as low as possible, of course. You could get equipment on hire purchase or loan or use a ‘rent a desk’ scheme, for example.

Utilise your friends and acquaintances – perhaps you know designers, IT professionals or PR experts? Set up a social networking account (eg Twitter) and find others in your area who are setting up businesses – perhaps you can exchange skills. I’ve done this many times – exchanging free coffee for help with my website.

7 Don’t put all your eggs in one basket

Share the risk when starting up. Spread the borrowing and the repayment terms. This will make everyone – including you – feel less vulnerable.

Sadie Hopkins is founder of York Coffee Emporium

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