Every new business needs finance when starting up. Most of the new businesses would need to establish the workplace, purchase equipment and meet marketing costs – all of this before the first sale is made. Once you’re dealing, you’ll need cash to pay for the bills and keep the business running.
To finance a new business, there are a range of options when starting up. Choosing the right options for your needs is very important. To finance a new business, you can use your own money, borrow from banks, family and friends or attract outside investors. Government support and grants may also be available. To finance a new business, most businesses use a combination of the above alternatives, according to the circumstances and their specific needs.
It is essential to have a precise idea of your financial needs. Once you have calculated the amount you’ll need to cover the initial start-up costs, you will also need to consider in your running expenses. Customers may not pay you immediately, but still you will need to pay all your bills to keep trading. It’s wise to have sufficient capital to cover projected expenses for at least the first six months.
You also need to make sure that you have taken into account how much money you need to live on. A new business, in its early stages is unlikely to produce extra cash that you can spend on yourself.
To Finance A New Business, Choose the Best Option
The type of finance you choose to finance a new business will depend on the kind of business you are starting, the amount of money you need and what you will use it for.
- Many people use their personal borrowings or their own savings to finance a new business. This may be the only choice if you are unable to convince anyone else to lend you money or to finance a new business.
- You may be able to borrow money from a bank to finance a new business if you have a credible business plan. Many businesses use overdrafts for day-to-day borrowing and loans to finance large purchases such as equipment. If your business is most likely to have troughs and peaks in its cashflow, then it’s important to be able to clearly illustrate these to your bank so you can plan an overdraft.
- You can take help from family or friends to finance a new business but you should consider the risk carefully, that they could lose their money if your business fails.
- A bigger business with fabulous prospects might attract investors from outside.
- You might qualify for a grant to finance a new business, example, if you are setting up a business in an impoverished area.
- If you are setting up the business in a deprived area, then you might be able to get finance for a new business from a community development finance institution. You might also be able to attract support from other businesses in your peer group.
Most businesses use a mix of finance sources to finance a new business. Example, to finance a new business you might invest your own money in market research, borrow from the bank to purchase equipment and machinery and bring in outside investors to share the risk.
Using Your Own Money to Finance a New Business
When starting a new business, it’s most likely that you will have to finance the new business yourself by putting in at least some of the money yourself. It’s usually difficult to attract other investors or borrow from a bank to finance a new business, unless you are also investing some of your own money.
The easiest way to provide your own financing is to use your own savings. If not, you’ll have to look out for other alternatives, such as:
- Selling your assets or possessions
- Borrowing privately
- Borrowing on credit cards or getting an unsecured loan
- Getting a mortgage
Don’t overstrain yourself because if you borrow too much to finance a new business, you may not have enough money left to cover your living costs while the business is running. You could also leave a contingency fund, in case you need extra money to see you through a difficult period. You should think very carefully before borrowing to finance a new business and you should match the financing to your needs.
Get Help from Family and Friends to Finance a New Business
Your friends and family might lend money to you to finance a new business or they might even invest in your business, e.g. by buying shares.
There may be tax implications for you and your family, especially on interest-bearing loans.
Use Banks To Finance A New Business
Before getting the finance a new business from a bank, it will want to know that you are a good risk. The bank will want you to:
- Present a credible business plan
- Offer security for any money it lends you.
- Invest some of your own money in the business.
- Provide a proof that you have a successful track record in business.
If you don’t meet all the bank’s normal requirements, you may qualify for finance for your new business under the government’s Enterprise Finance Guarantee scheme. Many small businesses use an overdraft to cover their borrowing needs. Incase you need longer term financing; it’s a good idea to consider taking out a loan.
There is no guarantee that your application for finance for a new business will be successful. Incase you have had difficulty the finance from a bank; Business Link offers a financial intermediary service.
This service helps businesses review the possible reasons why the funding was not granted, especially if the lender feedback has been limited. If you are eligible for this service, Business Link advisers can help you offer support with other access to finance issues, build a stronger relationship with your business’ bank and guide you on what to do when seeking finance. To offer additional help to small businesses struggling to get finance for a new business, a new Small Business Credit Adjudicator (SBCA) is being taken forward. A consultation would take place during the summer of 2010, which will discuss options for the SBCA in terms of its role and statutory powers. Once in place, the SBCA will work closely with the Business Link financial intermediary service to ensure that small businesses are treated fairly when applying to their bank for finance for a new business.
Get Help Of Outside Investors To Finance A New Business
If your business does well, the outside investors share in the profits, but if the business fails, they lose their money. Your company issues ordinary shares to the investors in return for their capital. Outside investment can suit promising businesses that don’t expect to produce a lot of extra cash in the short term but offer the potential of greater returns over the longer term.
Grants and Government Support
The main advantage of grants is getting cheap finance for a new business. Example, you might get a subsidized or zero-interest loan, or even an outright cash grant.
The government provides three Solutions for Business financial products that might help you get finance for a new business:
- Finance for Business offers flexible finance solutions such as loans and equity finance for businesses with viable business plans that are unable to get support from commercial banks and investors.
- The Enterprise Finance Guarantee helps businesses that would not normally qualify to get a loan.
- Small Loans for Business offers loans of up to £50,000 to small and medium-sized businesses that have viable business plans but have been refused bank finance.
However, if grants don’t work out, try companies such as Venture Giants. The discussed company is a leading Angel Investment and networking portal and connects active angel investors with entrepreneurs seeking investment to start up ventures or expand existing businesses. Drop your business proposal here and get visible to a huge list of active investors looking for such opportunities.