There are certain things that always seem to cost more than you‘d imagined: holidays, moving home, evenings out with friends. And setting up in business is no exception. So how do you raise the funds?
Do I need to raise finance?
If you have enough of your own capital – and willing to dig into it – then convincing
others to invest in your business is not issue. However, when seeking a bank overdraft or loan, applying for certain types of government aid, or when trying to attract new investors or partners, you will need to present a convincing picture of your business’s financial condition and future prospects.
Throughout the prestart-up phase you should be working towards deciding whether you will need finance, if so what type, when it is needed and how much will be required. The following will help you decide.
Your own money or that of friends and family?
Personal funding of a new business may come from any shares that you have,
personal saving, money released from personal assets or from re-mortgaging your
home. Asking for finance from your friends and family may be a sensitive issue that can test your relationships, but people who know you personally may be more
supportive, particularly if they have also run a business. It is advisable to draw up a
written agreement on issues such as how you intend to repay them. This makes it
clear that their funding is an investment and not a favour.
Bank loans and overdrafts
An overdraft is usually the best way to finance a temporary or fluctuating cash
shortage. Where a longer-term commitment is involved, a bank loan is often the easiest and most suitable form of finance. For businesses without a track record or
collateral, such as start-ups, a loan guaranteed by the Enterprise Finance Guarantee may be appropriate, although not all banks will suggest such loans are appropriate for your business.
Government assistance
The government and the EU may provide financial assistance in some circumstances. This may take the form of cash grants, tax concessions, funding of training or relocation, subsidised rents and so on. Assistance schemes vary from year to year, from industry to industry, and from region to region, with most assistance being concentrated in areas of high unemployment.
Other sources of finance
There are many other possible sources of finance available to a business owner,
ranging from debenture loans to venture capital provided under, for example, the
Enterprise Investment Scheme or Regional Venture Capital Funds. Through your contacts new investors may be found to increase the share capital.
Presenting information
When seeking a bank overdraft or loan, or applying for certain types of government
aid, or when you want to attract new partners, you will need to present a
convincing picture of your business’s financial condition and future prospects.
- To help with the issues in this blog there is a range of information and advice on icaew.com/sme.
- There are also resources available on the government’s business website www.businesslink.gov.uk.