FINANCING A BUSINESS

Like it or not, alternative business income generation is the order of the day today. Forget the security your salary job provides today, instability in world economy is sending governments and private organizations into panic mode.

To stay afloat however, it is essential to start building your own business now. Either you are managing it your self or you want to employ a hand, read through our Start up tips before you decide.


A key task for new businesses is to work out your start-up costs. As well as launching your business, obviously, you need to be able to financially make it through that all-important first 12 months.

Costs must be kept to a minimum, which requires resourcefulness, willingness to make sacrifices and often some good old-fashioned cheek.

Learning how to minimize costs from the start is a good habit that can help take your business on to greater things. When times get tough, cutting costs might be the only way you can steer your business through stormy waters.

As well as working out your start-up and operating costs, you’ll need to be able to predict sales. Welcome to the world of forecasting – a science requiring a dash of art and thorough knowledge of the market.

To predict sales revenue, you’ll also need to know how to set prices. For example, will you simply add markup to your costs (known as cost-plus pricing) or will you base your price on the value your customer will place on your goods or services? Whichever method you choose, you’ll need to get your prices right if your business is to succeed.

Once you know how much money you require to launch your business, you can decide whether you can do it with your own cash or whether you need to secure start-up funding from elsewhere. There are various sources of start-up finance to consider.

Start up funding

Raising enough money to start a small business can be difficult. The process begins with working out your start-up and operating costs for the year, which you can compare against anticipated sales. Even with a reasonably healthy turnover, your business might have to operate at a loss for a while, which means your borrowing requirements will be greater.

Once you know how much money you need (plus a bit more for unexpected expenses), you can consider how you can raise the money you need.

Personal sources of finance

Many people use personal savings to start their business. Others use redundancy money or raise funds by selling assets, such as shares, or by 'down-sizing'. However you raise the money, you will almost certainly need to invest some of your own money if you’re to attract funding from others.

Borrowing start-up funds from friends and family is a tried and tested option, but they should only invest money they can afford to lose. If the business fails, relationships can become irreversibly damaged.

Legal agreements signed by both parties are recommended: then everyone knows where they stand. Some friends and family members might be willing to provide an interest-free loan, while others will expect to profit, either through money or part ownership. You must weigh up the possible long-term consequences of conceding equity.

Banks and other lenders

In the past, providing you had invested your own money, could provide security and had a sound business plan/model, most high street banks would provide start-up funding, through credit or a loan.

However, traditional sources of finance, such as loans, overdrafts or credit cards, have become more difficult to access and you will face a rigourous application process to ensure you can meet your repayments. Find out from your bank what financial advice and assistance they provide to people starting businesses.

Some people have started businesses by remortgaging their homes. This can be less expensive than a loan, as payments can be spread over a longer term. However, the mortgage market has also tightened up dramatically, while many people are understandably uncomfortable at the prospect of putting their homes on the line. Make sure you understand the full implications of any money you borrow, especially if you are asked to provide security.

Most start-ups won’t be of interest to investors such as ‘business angels’ or venture capitalists/private equity firms as they will be looking for a higher return on investment and an exit plan.

Crowd funding has proved another funding option for a growing number of small businesses and start-ups. Crowd funding enables groups of investors to come together to fund businesses looking for investment. Each investor pledges a small amount in return for a stake in the business, return on their investment or another benefit (eg discount on products or services). There is a growing number of crowd funding platforms and they each operate in slightly different ways. Carefully research their criteria and the implications for your new business.

What about grants?

Grants are usually only available to specific types of people or businesses, often in economically disadvantaged places. Sometimes match funding can be required. For further information about grants, speak to your local Enterprise Agency or use the Business finance and support finder.

If you can’t raise enough money to start your business, try to reduce your costs. You might even have to change tack, for example, you could launch and try to establish your business on a part-time basis while working for someone else.

Banks and others are likely to have well-founded reasons for refusing to lend you money, so be prepared to reconsider your idea for a business if you’re met with a polite but firm ‘No’.

Ensuring healthy cashflow

As any small-business owner or adviser worth their salt will tell you – cash is king. It’s a familiar mantra, but what does it mean?

Maintaining healthy cashflow is critical – and it’s not just about making sure you spend less than you turn over. You also need to ensure you get paid on time, which will demand all of your credit-control powers. It doesn’t pay to be overly generous with your credit terms. When payment is overdue, sometimes you’ll have to cajole customers, while with others you’ll need to be much more forceful.

Cashflow difficulties are enough to have the most seasoned small-business managers worried. However, learning to spot the classic signs of cashflow problems as early as possible provides the best chance of averting disaster.