To be successful your small or start-up business will need to make sure you have enough capital to operate and grow. This can be confusing for experienced business owners and for start-ups it is even harder. Be aware many start-up businesses do not make profits for 2-4 years so you should be prepared to be able to finance the business for this time.
The first thing you will need to do is work out how much you need to borrow. This can be pretty difficult if you are a startup but the most import part of this can be to develop a comprehensive business plan. We do offer a service to help you write your business plan but you can also do this for yourself.
Your business plan should be comprehensive research into where you plan to take your business. This can be for start-up or existing businesses looking to expand. It should help you decide on how much financing you will need to move forward with your plans.
You will need to forecast the day to day sales and expenditures of your business as well as how much capital you will need to raise to fund purchases for things such as equipment and starting stock.
One important factor will be to make sure you are realistic, you might suffer from lower sales than expected and unexpected costs can arise at any time. It will be important to have some extra funds set aside so you can cover costs when they may arise.
Although more difficult there are still a number of financing options for start-up businesses. We, as finance brokers, are able to help you get access to these services and suggest the best options available to you.
This form of finance is the most difficult for a High Street Bank to provide. They have no track record of the business to evaluate and may not know your capabilities of running a business. Depending on your industry, there are other ways of raising finance but they are likely to be more expensive.
The main issues with finance for buying premises for new businesses are providing the deposit and proving the ability to service the proposed borrowing. If you don’t have the deposit you will not obtain the mortgage and even if you do, the ability to service the debt is then carefully assessed, normally with a margin of safety required.
Again, High Street banks are more reluctant to provide, what they would regard as unstructured facilities, at an early stage of a business’s evolution. If you are able to obtain an overdraft, make sure to use it sparingly to cover timing differences, banks do not like solid overdrafts, which they call “hardcore”.
Many fledgeling businesses suffer growing pains, once they have cleared the initial hurdles of establishing the business and obtaining orders and sales. By using their debtor book to help to finance their ongoing working capital requirement, they can obtain a facility that can grow in line with their business.
Retail businesses can look to their credit card sales, where some providers may insist on a deferred settlement period, to provide cash flow for their business.
A business loan could be used to buy capital items, such as plant and machinery or fixtures and fittings; to fund stock purchases or pay wages. While useful to get the enterprise off the ground, it does have the disadvantage of then just being a burden, as repayments will need to be made. Remember that profits do not necessarily equate to immediate cash.
It will be easier to obtain finance if you have assets, such as property, to secure any borrowing. It will make the interest rate lower and lenders will be more amenable to providing, what they almost regard then as “pawnbroking”. You need to bear in mind that any security offered may well be sold if the business fails, sometimes at below market value, if a speedy resolution is required by the lender.
It might seem strange to give up some of your business to an outside investor but that is what “Dragon’s Den” or “The Apprentice” is all about. In addition to obtaining finance, you may also obtain expertise and a mentor, who can help to guide you through the difficult times. The equity investor then also has a vested interest in helping you to make your business successful.
This is a relatively recent and expanding form of finance. Basically, investors, who are obtaining a low rate of interest from traditional sources such as banks and building societies, place money with peer to peer lenders, who then provide finance to businesses. The interest rate will be more expensive but the vetting procedures are, currently, less invasive than the traditional funders. Loans can be short-term, however, which can lead to problems for businesses, just as they are looking to expand.