This is probably one of the most asked questions when people speak to me about wanting to start a business. Although the topic of securing business funding can seem daunting at first, there are all sorts of different ways to finance your brand new business idea once you know where to look. Granted, there are a lot of choices out there and there are also many myths especially when it comes to grants. So, when it comes to business funding there’s a lot of different roads that you can do down. Once you understand which is the best route for you then you will be able to work on locking down the best possible deal. So, let’s get started with the three key things that you need to do first before even thinking about business funding.
1) Have you done your research?
To get any kind of funding you will need to research and plan your business so that possible investors know what it is that they’re investing in and how they are going to get their money back. So in other words, write a very detailed business plan. You need to add all the relevant information in regards to your business, what will make your business stand out from the competition and more importantly you need to add parts about your financial plans and projections. If you would like more help on how to write a good plan then check out our blog post on how to create a business plan.
2) Do you know how much you need?
This should all be part of your business plan but make sure that you don’t over borrow. If you don’t work out exactly how much you need and your reasons for why you need that amount then it looks bad for possible investors. Get it right the first time. Borrow too much and you could end up paying interest on the extra cash flow. Borrow too little and you could end up running out of money before even really starting. My advice would be to think of more than one scenario about how well your business will do. If an investor was to invest 20k then that would lead to X amount of sales from X amount of customers. Or if the investor was to invest 35k then that would lead to X amount etc.
3) What do you need the funding for?
Maybe you’re past the start-up stage and you are wanting to expand your operations and you need a certain amount to make it happen. Every single business funding lender will need to know exactly what the money is going to be spent on. It’s even more strict if you’re planning on going down the grant route. You will need to provide the exact information of where you are planning on getting the stock or whatever it is that you’re using the money for from.
So, where do you start with getting your hands on actual business funding? There are numerous ways that you can get going. Some are obvious and some take a lot of planning and research.
This is the easiest and safest option. By using your own money or savings you have complete control over your business. You can start as small as you want and you also get to keep all the profits and retain control of the business. You can also keep your day job while making sure that your business actually works.
– You don’t have any interest repayments or loan charges to pay.
– It proves to potential future investors how committed you are to your business.
– It could potentially put you at financial risk if your business does not work out as you expected.
– If you already have some debt and you can’t keep on top of the repayments then you could find yourself in big trouble.
Friends & Family
This is a great cost-effective way to get your business funded. If you have a family member who has spare money that they aren’t doing anything with then it’s worth asking them if they would like to invest in your business. You will have to decide with them if you want the money to be a loan or if they would like a cut of the business in return.
– Friends & Family are more likely to support your business idea.
– You should be able to negotiate much better terms and conditions over the banks.
– It could potentially put relationships at risk.
– The lender could become finically unstable at some point too.
Okay, this one seems to be the one that everyone dreams of. There are a lot of business grants available out there and yes they do fund your business for free but they are usually extremely hard to get hold of and they tend to be quite industry-specific. There’s no point in trying to get a grant unless you are prepared to overcome these potential hurdles:
– Grants are usually only available for businesses that are doing something that will better the area, environment or create multiple jobs.
– You must be willing to put in your own money too. Grants covering 100% of costs are almost non-existent.
– You must have a solid plan. You may have a really good business plan for your business but you need another one just as good that is more specific on what you need the grant for and exactly detailing how the money will be spent.
So, what type of businesses are more likely to get accepted for grants? The top ones are Energy & Environment, Innovation, Training & Investment, Exporting and Start-up businesses. There’s a number of grants out there that like to help young people start their own business. Unfortunately though, if you have money already, a job and live in certain areas then you are usually not eligible for a business start-up grant. The best thing to do before applying for any kind of grant would be to read about their requirements first. Here’s a snippet from the Princes Trust website regarding business grants. “Our Enterprise programme is for young people who are currently unemployed or working fewer than 16 hours a week and are interested in exploring whether self-employment is right for them. It’s designed to help you make that decision and explore your idea further, rather than for those already running their own business.”
I remember getting told that I was not eligible for a grant when I tried to get a business grant for my own business because I worked full time at the time. You can literally spend hours and hours searching and applying and not get anything in return.
There are grants available for any businesses if they hit certain guidelines and if they are going to be improving their local area, environment or to create jobs. Remember that business is business. The government won’t put money into your business unless they get something in return. I.E creating more jobs. That doesn’t mean that you won’t get one though, as every business in every area is different and if you have the time to apply then you might as well, right? Check out the grants that are available in your local area by clicking here.
– The money does not have to paid back.
– You still retain control of the business.
– The application process can be extremely long and can take up most of your time.
– The money will usually only be for a percentage of what you need.
Business Bank Loan
With a business bank loan, it is just like every other loan. You pay back a certain amount each month, with interest, for a set period of time. It’s a very well-known fact that business banks usually do not lend money to brand new businesses. In the cases that they have, the business owner would have already had in place a good amount of money to put behind the business themselves and possibly have a business grant too. Of course, if you have already been running your business for longer than 24 months then you have a good chance of getting a business loan to expand your business. Just call your business bank manager to find out more.
While on the topic of loans there is also a number of government-funded start-up loans available for new businesses that are worth looking into. Again, this doesn’t apply if you already have a business. If you are a brand new start-up business it is really worth checking it out by clicking here.
– You don’t have to give away any of your business equity.
– A repayment schedule means you forward-plan your business finances.
– The interest rates can be quite high for business loans.
– It’s likely that you will have to stump up some of the money yourself.
If you’re prepared to give up a share of your business, consider getting an investor involved. Investors are private entrepreneurs who invest their own money into businesses that need capital and their expertise. Remember, it’s not just capital that you get from an arrangement like this. If you pick the right investor, then the things you can learn from them is invaluable. This is, in my opinion, one of the best ways to get your business either started or to the next level. There are plenty of places that you can find an investor, maybe you already have someone in mind that you want to ask? Ask them! If not, then go and network at entrepreneur events and also check out sites like The Angel Investment Network.
– No super high repayments or interest.
– Make the most of your investor’s knowledge and contacts.
– You give up a share in your company as well as some control.
– You may be under more pressure for the business to succeed.
This type of funding is becoming hugely popular. A growing number of people are prepared to invest or donate money to business start-ups that they like the idea of. I have seen many multi-million-pound success stories on Kickstarter. You will have to work hard to convince people to invest or donate their money to your project. The great thing about sites like Kickstarter is that people can donate from as little as £5 all the way up to thousands.
It seems the best crowdfunding success stories have been rewards-based which means that the people donating are actually buying an item that they are interested in before it is ready to sell. This is such a great way to not only see if your business will work but also a great way to get funds and customers for your business before investing heavily. Of course, it could go either way and it could be unsuccessful. I have seen many businesses try and get Crowdfunding. They post it all over social media to try and get people involved but when they don’t reach their target it can look really bad as everyone knows what they’ve been trying to achieve. Not only does it look bad but I can imagine it is also a bit of backwards step when trying to keep motivated on your business.
– You can practically sell something you haven’t even made yet.
– You get to see how popular your product is before investing heavily yourself.
– You have to be prepared for if it does really bad or really well.
– Make sure you can actually offer whatever it is that you’re selling.
I thought I’d just give you some words of warning. Don’t take private investment, angels, friends and family as good sources of investment capital just because they are described here or taken seriously in some other source of information. Some investors are a good source of capital, and some aren’t. These less established sources of investment should be handled with extreme caution. Trust me, I’ve been there. Just because someone has money does not mean that they are going to make your business better and more profitable. Treat investors like you would treat a bank. Don’t just sign your life away before shopping around and really digging deep into what you’re getting into.
Never ever spend somebody else’s money without first doing the legal work properly. Have the papers done by professionals, and make sure they’re signed. Never ever spend money that has been promised but not delivered. Often companies get investment commitments and contract for expenses, and then the investment falls through. Avoid turning to friends and family for investment all the time. The worst possible time to not have the support of friends and family is when your business is in trouble. You risk losing friends, family, and your business at the same time.
In summary, remember that most businesses are financed by home equity or savings when they start. Only a few can attract outside investment. Venture capital deals are extremely rare. Heavy borrowing will always depend on collateral and guarantees, not on just business plans or ideas. If you can’t get hold of investment or you don’t have any money to start a business you could still be in luck. Read our post on how to start a business with no money.