Many businesses start life without investment from anyone other than the owner and even then, the investment amount is small. Starting out on a shoestring can have huge advantages: you won’t have a debt to repay, you won’t have to answer to an investor, and the profits of the business will be yours to reinvest. Don’t automatically assume that you need investment at the point of start-up; many entrepreneurs have started out with next to nothing and have gone on to be very successful. More important are factors such as your business idea, the amount of time you put into your new venture, your dedication and support from your family.
Costs can be reduced by keeping your operation simple at the start. Ask yourself if you could work from home or do your own book-keeping instead of employing a book-keeper. There is a wealth of information on the internet about tax, VAT and PAYE and, if you are prepared to do a little hard work, this aspect of business management can take far less time than you had anticipated or feared. Conversely, not getting the correct tax advice can prove costly so perhaps arranging a free consultation with a local accountant could prove beneficial.
Before you even consider options for funding you should have done the groundwork for your business; this includes an analysis of pricing and profit, market research and a SWOT analysis (strengths, weaknesses, opportunities and threats). In addition you should know how you are going to find your customers and sell them your product or service.
If you are starting a business that needs to hold stock, buy capital equipment, work from premises or employ people, then it is very likely that outside sources of finance will be essential from the outset. Alternatively, you may have been trading for some time and have reached the point where you want to grow your business to the next stage. In this case your reasons for needing finance will be different; perhaps you want to buy new plant or machinery, develop a new product line, overcome a short term cash flow issue, relocate to new premises, or acquire a competitor business. No matter why you want the funding, one principle remains: the money you obtain should be competitively priced and the terms of repayment should be appropriate for your business.
In principle, you could do exactly that! But an overdraft is unlikely to be available to you for financing the business, only for short term cashflow needs. Ask yourself how long you will need the money for, how it will be spent, how – and when – you plan to repay it, and what the total cost (including interest payments) will be. You might be able to borrow from friends or family and pay them an interest rate that is lower than you would pay the bank but only do this if the basis upon which you plan to repay your loan is robust; many family disputes and broken friendships have started with non-payment of amounts due!
If you plan on approaching your bank for finance you will need a business plan. For new businesses (including those that haven’t yet started trading) this document is essential. It will show the bank manager what your business is about, who and where the market is, what your SWOT analysis revealed (see above) and how you intend to deal with the threats and maximise the opportunities, and it should outline your plans to grow the business over the next 1 to 5 years. Your business plan must include financial figures that show your unit selling price, profit and costs, and give an extrapolation of what will happens when sales increase; as a guide this could be on a monthly basis over the first year and subsequently show how sales and profits increase in years 2, 3, 4 and 5. Almost no business works out in the way anticipated in the plan, but at this stage it will be your best guess based on the information you have at hand and that’s what your bank will use to assess your worthiness as a debtor. The business plan will also contain a cash flow forecast that is key to understanding the business’s funding requirements and, therefore, how much you will need to borrow.
Banks will be ready to lend when they see good planning, thorough market research, a sound business idea (not necessarily a unique idea but one that is made attractive through a unique proposition) figures to support your claims, and feel comfortable in dealing with you. They will not respond to people who want funds to ‘tide them over’ or simply because they have ‘run out of money’. The bank is there to make money just as much as you are and they will be keen to understand how the money they lend you will become a good investment for their own customers. A bank may well require you to provide personal security against the loan to reduce the level of risk they are taking.
If you’re stuck and don’t know how to begin putting your plan down on paper there are a number of ways you can find help. There are online resources that will give you ideas and books that cover the subject in some depth but one of the best ways is to go on a course that not only introduces you to business planning but also introduces you to other entrepreneurs who, like you, are setting up their first business. Colbea’s business planning course covers all the essential areas you will need to know. It is organised on a flexible basis so that you don’t need to take a large chunk of time out of your existing employment or your new business start up to attend. At the end of the course you will have the wherewithal to generate a professional business plan document that you can take to a bank or any other investor.
Venture capitalists usually lend large sums of money to high growth start ups such as IT or bio-tech companies, or to people who have a completely new idea or invention. These types of businesses often need injections of cash to get them off the ground and are rarely the small ‘back bedroom’ start up. Venture capital can be funded either from one wealthy individual or, more likely, by a company who has collated wealth from many sources. Both will want to see a strong return over a fixed period of time. They view their investment as a calculated risk and will only put money into companies that show promise of significant growth.
The venture capitalist might become involved with the business in ways other than financial, perhaps opening doors to the market place or providing experience and skills. Unlike banks, who will want the original amount of the loan returned plus interest, the venture capitalist will ask for shares in the company. If the company does well the venture capitalist will benefit from the wealth that has been generated. Should you be considering investment from a venture capitalist or similar source you are advised to consult with a lawyer who is a specialist in this area. Venture capital can open up opportunities but you must be aware of the pitfalls and ensure you have a watertight agreement in place that reflects your ultimate objectives for the business.
Certain types of business may be eligible for grants or interest free loans, for example to encourage development in poorer areas of the country, to generate tourism, to install environmentally friendly technology, or to benefit certain social groups. There is a wealth of information about what’s on offer on the website www.grantsnet.co.uk. Grants are available for ordinary commercial businesses but are more commonly awarded to social enterprises, charities, voluntary organisations and public sector businesses. The grantsnet website will tell you who funds the grants (e.g. the government, the National Lottery, etc.) as well as who can apply.
Funding is sometimes available for businesses that start up in rural areas and promise to bring prosperity and employment to the local economy. More information can be found on the website of the East of England Development Agency at www.eeda.org.uk/rdpe
If you are between 18 and 30 you might be eligible for start-up funding through The Prince’s Trust, who act as lenders of last resort for younger people – you need to have been turned down for a loan by a bank before they can consider you. Their counterpart for more senior members of the community wanting business funds – over 50 - is Prime who, although they no longer offer loans themselves, operate as a gateway to Zopa, a UK loan exchange.
If you are a business start up you should:
- Draw up a business plan. Colbea can help you with this – see details at the foot of this article.
- Decide whether you really need the funding. Things are always tough at the outset of a new business. Will having a loan turn ‘tough’ into ‘impossible’! Colbea’s business advisors will help you make this assessment in an impartial and professional way.
- If you need funding approach your bank armed with your business plan and be confident. Know what you are going to say, have how much you need, why you need it and when you will be able to pay it back.
If you are an existing business that wants to move on to the next step:
- Get an outside opinion about your plans. An objective view can be worth a great deal. Colbea’s advisors offer this service.
- Re-visit your business plan and update it to take account of your new plans.
- If you want to buy out a competitor or merge with another business, get your accountant and lawyer involved at an early stage.
- If you believe you have a unique idea that could generate wealth on a fast-track basis, consider venture capitalist funding.
- If you are supporting your community in any way examine what grants are available in your area.
Colbea provides confidential business advice on a 1-2-1 basis and organises courses that introduce you to business and teach you how to draw up a professional business plan. Call for details on 01206 548833.
Thanks go to Coblea Sponsors, RDP Partnership, for their assistance in compiling this article.
