Funding your business – Start Up Guides – Part 6

Once you have decided you are starting a business you need to think about money to fund the business venture and how you are going to get it.

In this, the sixth part of our start up guides we look at the more common types of funding you will come across. You may need money to cover initial expenses or you may need it for expansion, what ever your needs we are going to cover the different methods in this part of our guides.

You need to ask yourself these few questions before you can deal with where you go for funding:

  1. How much money do you need?
  2. How much of your own money are you putting in?
  3. How are you going to spend the money?
  4. Why should a lender lend to you, can you convince them you are a good business risk?
  5. Will the location of your business or the economic or political climate have an effect on your business?

These are only a few of the kinds of questions that will go through the mind of any potential lender, after all you are asking someone to lend you their money, it is only fair they make sure you are taking this seriously, and having the answers to the above questions proves you have given this matter some serious thought.

You will also need to be armed with your business plan/forecast when you go looking for funding. Any potential lender will want to know about your business, they will want to see what your cash projections look like, this way they can better understand your need for funding.

Funding comes in two forms, debt or equity.

Debt

This means borrowing money from family, friends, banks or other investors.

Equity

This means in exchange for funding you sell a part of your business.

Sources of debt financing

Banks

  1. Overdrafts – these are set at a predetermined limit which is reviewed on an annual basis.
  2. Loans – both short and long term. These are both over a set period of time with regular set repayments.

Leases

If you are buying equipment it is common to purchase this under a leasing agreement,  these agreements tend to be a bit more expensive than conventional bank finance. In common with bank loans the finance is for a specific amount and repayable by monthly installments.

Trade credit

Most of your suppliers will supply you with goods and services which become due for payment on a given future date, this maybe within 30, 60 or even 90 days from the invoice date. This is a very important part of credit for any small business. Your suppliers will set the credit limit for your business themselves, over time you may be able to extend this giving yourself much needed breathing space.

 Sources of equity finance

Venture Capital Companies

A venture capital fund is often backed by a group of investors, with a management group that evaluates potential investment opportunities. The cost of this type of funding is high compared to traditional lenders such as banks.

Business Angels

On a smaller scale than a Venture Capital Company are Business Angels. Business Angels are private investors who have experience of running their own business, who can fund a start-up and early stage ventures and who can bring expertise to an entrepreneur.

The advantages to the above two methods is in exchange for part of your business you not only get the much needed funding but also advisors on your board with experience of not only running but also growing businesses.

A good place to start when looking at either of these two forms of equity finance is the British Venture Capital Association.

The above is only a bite sized guide, but I hope you have found it useful. As with anything in today’s business world please take professional advice first.

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