Many people who first go insolvent through company liquidation services, then make a success of their second venture. So you have got a great idea, a fantastic business plan and all you need now is the money, but where can you find that all important finance for your new venture?
There are a number of places you can look to find investment in a new business. Some are more suitable than others.
There are two main types of finance for a business; debt and equity.
Debt finance is just as it sounds. You or your business obtains a cash injection in the form of a loan. Equity investment is different. Essentially you sell part of your business to an investor who then hands over cash in exchange for part of the business, a share of any profits and any sell on when you exit.
The most efficient way to raise cash for a start up is to raise equity investment. When people buy shares in your company you don’t pay interest on the money invested which means that it is excellent for cash poor new starts.
Of course the problem is that you are selling part of your business and with that go a whole set of responsibilities. You’ll probably have to part with a larger slice of the business than you’d like and when you do sell or pay dividend then naturally your portion of the proceeds will be less. Some people also find that the stakeholder management required with fellow shareholders reduces the amount of time available to focus on core activities.
The best way to finance your new start is from your own savings. If you’ve got cash on hand then it makes sense to use that rather than to start paying fees and interest for loans or paying dividends to another shareholder. You’ll need to take advice as to whether it is better for you to buy shares in your new company or to provide it with a loan but either way you’re likely to find it easier and cheaper than going elsewhere.
Of course not everyone has a pile of cash sitting around so if you are looking to raise money through debt then there are some things to think about.
As a new start then the obvious route of a bank loan is likely to be more expensive or less available than if you have been trading for a few years. Banks charge according to risk and a new start is inherently more risky than an established firm.
Nevertheless some banks have excellent start up packages and if you have a good credit history and have a long standing relationship with a bank then this is a good place to start. You may find that if you only need a small amount of money to start up then you can fund it through a simple overdraft on a business account.
Some business owners raise cash through credit cards. This may indeed seem like a good idea at the time but be aware that although this is quick and easy the interest rate will be high and your repayments are probably going to be much larger than a simple term loan.
Some firms are in the lucky position of starting up with contracts and customers in place already. The problem they face is that they have no cash available to run the business whilst they are waiting for the customer to pay.
Good examples of these would be a recruitment agency that supplies temporary workers and has to pay them before they get paid in turn by the client, or alternatively a company working in construction that has to allow long terms for payment but still has to pay workers and buy materials in the meantime. For these businesses it is worth looking at factoring.
Factoring is where the debt that the customer owes is essentially sold on to a finance house that in turn advances a large part of the value of the invoice immediately. This means that the business has less cash to find in the short term.
One area of finance that has really taken off in recent years is that of crowd funding. This is where large numbers of investors either buy shares or advance loans to a business.
Companies like Crowdcube1 put together many small shareholders who each take a micro stake in a business, often new starts or in the early years. Other sites such as Fundingcircle2 do exactly the same thing, but instead of advancing cash for equity they provide loan finance for firms.
In each case the company will be required to produce a certain amount of documentation to back up their application however a loan is likely to be at a better rate than available from a high street bank for a start up.
Angel Investors take an equity stake in the business in return for cash but also provide expertise and contacts to allow the firm to grow. Usually they are experienced business people who are able to bring to bear their contacts and knowledge to push the company on quicker than it would ordinarily grow. However you can expect that they will want a greater stake in the new firm and expect to take a much more involved position.
As a new business it is tempting to look to family and friends for finance. It’s important to note that experience shows that this is a source of many arguments and fall-outs. If you are considering taking investment of this type then you should make sure that you insist on the same level of professionalism and documentation that you would for any other investor. Don’t make the mistake of thinking that because you are borrowing from family and friends that everyone will understand the situation and be happy if the business goes bust.
Not included in the equity/debt equation is the aspect of grant and award finance. This is especially useful for community interest and not for profit companies. That having been said there are a number of organisations that give cash help for commercial companies that are starting up.
Look for a local development zone that gives help for start ups, local authority grants and also specialist organisations such as The Princes’ Trust or Young Enterprise that provide cash and help for new starts. You’ll also find that some banks have special schemes to encourage start up businesses with loans and assistance.
Whatever business you are in you’ll find that money becomes an ever important aspect of your day to day work. Making sure that you have enough working capital and cash to invest in development activities will be important if you are to grow your new start into a viable long term business.
Finding the right type of finance, at an acceptable cost and in the right amounts will give you a great platform to grow your business for the future.