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Raising business capitalBusiness capital to start-up a new business typically comes from an assortment of the following sources at varying stages of the lifecycle of your business. Items 1-4 are commonly used as seed capital, 6-8 for seed capital and to expand growth. Banks will usually only want to finance businesses where there is already a revenue stream or where there are low-risk assets like property on which to secure a loan. Sources of business capital
Putting up your own, or someone else's money, to set up a new business, invest in a new idea, buy a franchise or buy a 'going-concern' (an existing business) is a serious undertaking. Even if you don't need to borrow money, you should have a meticulous understanding of the financial dynamics and viability of your business. This should form part of your business plan - there are some examples in the starting your own business section. If you do need to borrow money, your investor will, quite rightly, want to know that they will be able to recoup the value of the loan and get a reasonable return on that investment over a period which is mutually acceptable. If you don't have any assets on which to secure a loan such as property, you may well find it difficult to borrow money from traditional sources like Banks. If you secure a loan on your home and you don't pay it back according to the agreed terms, you stand to lose it, so you must be rigorous about this, however tedious it may seem. According to DTI research, while it may be slightly harder to get a start-up loan without a track record, only 10-20% of applicants for a business loan are rejected, overall. So, don't let the 'fear of financing' factor stand in the way of your great business idea. It's easier than you might think once you know how and follow a few basic rules. You need to consider your finances in 3 core categories 1. Your start-up capital, one off costs or charges associated with starting up such as product R&D, setting up a limited liability company, premises deposits, franchising licences, logo or website design etc. Your business plan needs to be very clear in this regard in order to attract investment. 2. Your working capital i.e. the money you need to run your business from day to day - staff wages, stock, rent, rates, utilities, professional fees etc. Many businesses go out bust, not because they don't have great products or services but because they have poor control of their cash-flow meaning that they can't pay their essential bills. Poor cash-flow management is usually the key failure area for businesses so getting good credit terms, invoices out and payments in quickly, is critical. Invoice factoring is a common way for businesses to overcome some of these issues at certain stages of company growth. 3. Your revenue or income i.e. How much money will the sale of your goods or sevices bring in? What will your pricing strategy be? Will the revenue cash-flow synchronise with your cost cash-flow? What kind of credit arrangements will you give, and what will you get? Getting help You can get start-up advice via your local Business Link office and they will also be able to give you advice on grant aid and introductions to Business Angel or Venture Capital (VC) networks. You will almost certainly need to appoint an Accountant at some point and either acquire some basic book-keeping skills yourself, or hire someone to do it for you. Where you are securing Angel or VC finance, you will also need a good Lawyer to set out the terms of the deal. Venture Capitalists - VC's use pooled funds from a group of investors which may range from individuals to pension funds. They are looking for the highest possible return that they can make. You must prove that your business idea is worthy of the large returns that they would expect to make, that you are capable of delivering on your business idea and can stick to your business plan. They invest in return for equity in your company which means that your control is limited or at best diluted. This is not an option for the faint hearted or for anyone seeking less than around £1million of investment funds. VC's are inundated with requests for investment so your plan, your idea, must stand out. They need to understand how they will get their money out and how much they will make before they will put their money in. This is more important than them being able to understand the minutiae of your business idea or great invention so make sure that your plan spells this out clearly. To understand more about VC's, take a look at the book review of 'Raising Venture Capital Finance in Europe', by Keith Arundale here. Business Angels - an alternative to Venture Capital providers as a source of smaller amounts of equity capital. These investors are private individuals, usually with a business background. They are willing to make investments in small business in return for an equity stake. They can also offer the benefits of their own management expertise. You must ensure that you don't give away too much of your equity or control, ensure that they have the right expertise to help you and that the chemistry between you is right. Keeping track For a simple business with a few high value sales you may not need much more than a good filing system and a well set up spreadsheet to manage your finances. Don't run out and buy something like Sage, the ubiquitous accounting software package, if you don't need it. If you do, don't skimp on this aspect of your business or you may well live to regret it. You must be able to demonstate to your investors and the tax authorities what you owe, what you are owed, your balance sheet assets, profit and loss situation and tax liabilities. Financing resources you may find useful The National Business Angels Network - Tel:020 7329 2929
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