Congratulations! You’ve got a business idea that’s hot to trot. Now it’s time to turn it into a reality.
The problem is, you’re going to need some start-up funding to finance your business before you can get anything off the ground, and you’re not sure where to start.
Here’s our handy guide to understanding financing your business.
Understand your options
Business funding usually falls into two categories: debt, that is, borrowing money and paying it back over time, usually with interest, and equity finance, which is when shares of the business are sold to investors.
It’s not unusual to use a combination of these approaches and be aware that there are several types of financing within both categories.
Make sure you’re pursuing the right type of funding for your business. Some may be easier to come by, but that doesn’t necessarily mean it’s the best fit for you or your company. Think about where you are in your business journey to help you find the right option: What are you funding, how much do you need, what is it going to cost you?
Work out how much you need
Any bank or investor will want to know that your figures are sound, so when you’re putting the numbers together make sure that you’ve thought things through properly. What is it going to cost to get started? Do you need to buy equipment, stock or uniforms? How much is your website going to cost and what other marketing tools do you need? How much will the early days of the business cost? Have you considered overheads that sometimes get taken for granted, like rent and utilities? Have you built in a buffer for any unexpected expenses? Project your running costs as well as your start-up, and make sure you’re giving yourself the space to grow and thrive, not just survive.
Understanding loans
If you’re looking at the ‘debt’ option for finance, it can come in several forms, such as:
Term loan: A lump sum which you repay over time.
Line of credit/credit card: Funds available to use as and when needed
Peer-to-peer lending: A crowdfunded loan
Invoice financing: An advance on the invoices you’ve issued
For any kind of loan application you’ll need your business plan and financials. Expect to have your credit rating checked and understand that some loans may require you to offer some form of security.
Whilst it can be tempting to accept the first loan you’re offered, make a list of your options and really analyse the pros and cons for each.
Finding investors
Finding investors is a little more complicated than trying to get on Dragon’s Den! However, Equity financing has become more popular in recent times, thanks to the rise of tech industries. Whilst banks were less willing to take risks with tech startups, private equity investors were able to see the potential… for which they were handsomely rewarded!
The main sources of equity finance are:
Angel investors (also sometimes just called Angels) – individuals who invest their own money for a stake in your business.
Crowdfunding – raising funds from the public (usually through an online platform) in exchange for unlisted shares in the business.
Venture capitalists – these are professional investment companies, which invest money for their clients, usually for a substantial share of the business.
Business incubators and accelerators – these are development schemes which build and boost small businesses.
There’s a lot to consider when it comes to equity financing. How much of your business are you willing to part with, and how much input might your investors want to have?
Know how to pitch your business
Whichever way you’ve decided to pursue financing, it’s going to involve pitching to people. We’ve already mentioned your business plan but it’s really important at this point. You need to show people that they can trust you with their money (whether that’s an investor or a bank) and what you’re going to do with it. Get them excited about your ideas and show them that your business has real potential.
Make sure you can answer all and any of their questions and really demonstrate that taking a chance on you will pay off.
Of course, when it comes to your financials it’s best to get professional advice where you can. If you’re about to start your adventure and would like to talk through your options, get in touch! We’re here to help.