How to finance your own business
Starting a business can be a life-changing experience. But, according to Emma Jones, author of Spare Room Start-up and founder of website enterprisenation.com, after you've dreamed up your winning idea and researched your target market, the key to success lies in finding the right amount of funding.
"You can start a business for less than £50 and make a profit within a week by using technology to help sell your goods and promote your services," she says. "But when the company starts to grow, you'll need to consider funding."
Stephen Alambritis, chief spokesperson of the Federation of Small Businesses, adds: "Even if you decide to work from home rather than pay rent, and don't need huge wads of cash upfront, you'll need access to capital. You should have access to a safety net of up to £10,000."
This might seem like an impossible mission. Where can you raise that amount of cash? How much is a reasonable rate of interest? How do you avoid getting ripped off? There are a variety of ways, however, to tackle the issue.
Get a grant
According to Alambritis, there are plenty of loans and grants available to help you get your business up and running; all it requires is research.
"If you're 30 or under, the Prince's Trust is worth considering, while some local town councils offer grants," he says. "Take a look around to see what's available before borrowing the money."
Grants to help with business development are available from the government, as well as the European Union, Regional Development agencies, local authorities and some charitable organisations.
These include assistance in buying key assets such as buildings and machinery, help to research product development, and even support in job creation if you can demonstrate your business will play a role in stimulating the local economy.
What's available will depend on the nature of your business and where it's situated, so the best starting point is the Business Link website - just type in your postcode to find out what's on offer.
Go it alone
The next option is to self-fund - putting your own money, such as personal savings or redundancy payments, into the business. This has the obvious benefits of eliminating the need to go cap-in-hand to institutions or repay interest.
Those with more limited funds may opt to use a number of credit cards. If you can secure short-term funding at a 0% rate then this obviously makes sense, but some interest rates can be punitive, so plastic should never be a long-term option.
Mum-of-two Sarah Bartram, 29, is one such early-stage entrepreneur. As the founder of online business bigpopslettershop.co.uk, which makes and decorates large wooden lettering, she wanted to limit her initial outlay and grow slowly.
"I set up the website and bought my wood, jigsaw blades and sandpaper with just £250," she explains. "I buy the rest of the stock as the orders come in, using the money I make from sales. I've been operating for six months and am breaking even."
Although she has a bank account, Sarah is reluctant to get into debt. "I have a credit card, so the option is there for me to use it," she says, "But I'm going to try my hardest not to use credit or loans, even if this means it takes longer to grow the business."
For more on this, watch our Moneywise TV episode: Starting your own business
A wealthy benefactor - or family member who is prepared to co-fund your project - can also come in very handy. This was the route chosen by Angus Elphinstone, now 28, who has twice borrowed money from his mother.
"No one was really lending at the time and I couldn't get anything from the banks as I didn't have any track record," he recalls. The first loan was for £10,000 to buy a van back in 2006, when he decided to quit his job as an estate agent and start his own transport firm, White Van Gentlemen, serving clients in upmarket west London.
As the financial crisis hit, Angus started to get requests from clients who wanted only one or two items moved and so were reluctant to pay a lot of money. This prompted him to start a web-based business called Anyvan.com.
The idea was that anyone who wanted an item moved to another part of the country would put a request up on the site and transport companies that were already going in that direction would bid against each other for the job.
The web business required just over £50,000 to start, so Angus took £28,000 from his original company and borrowed £25,000 from his mum. "I had paid her back the first £10,000, so she was willing to help me out again," he explains.
"It has worked out well and saved me a lot in interest, but you've got to be careful because if the arrangement goes wrong it can affect the whole family. My advice is not to borrow too much."
Borrow from the bank
Borrowing money from the bank has traditionally been the main source of finance for small businesses, and they are starting to lend again after their reluctance at the height of the global financial crisis.
It's important to shop around and see what's available. Some may offer free banking to new businesses for the first couple of years, for example, as well as advice to help you get underway.
If you already have a long-standing relationship with a bank, talk to it about your plans. It may offer existing customers more favourable terms. It's also worth speaking to other local businesses to find out their experiences with various banks and which ones they chose. You'll soon get an idea of which banks to avoid.
Make a list of what you want from your bank, such as an overdraft facility or a certain rate of interest, and then draw up a list of three or four institutions that meet these needs. You can then book appointments with each to discuss what they can offer you before making a decision.
Of course, you'll need to be able to provide detailed information about your business proposition. Huw Morgan, head of business banking for SMEs at HSBC Commercial Banking UK, explains that lending decisions are based on a firm's cash-flow management, balance sheet, business record, management team and business plan.
"A strong plan will give you the opportunity to demonstrate this," he says.
The other option is a private investor or 'business angel', as shown on hit TV show Dragons' Den. The deal is that you hand over a percentage of your business, and they give you an amount of money, and - potentially - their time and support, to help your venture grow.
Jones believes this option can be beneficial. "It's advisable to look for a source of funds that delivers more than just capital," she says. "It's ideal to have an investor who also can bring skills and experience, or facilitate introductions to other companies."
Of course, such an arrangement can bring its own difficulties. "A funding relationship is like a marriage and it may run into problems if the two parties have different expectations," Jones adds. "The way to guard against this is to have a clear contract from the outset."
How to draw up a business plan
A business plan should be short and focused, so write a one or two-page summary that's easy to read and gets the key points across. Appendices can be used for further detail.
• You will need to describe the market in which you will be competing, adding in information about key trends and how you plan to market your product or service.
• Next you will need to outline a SWOT analysis, which stands for strengths, weaknesses, opportunities and threats. This must highlight competing products and how and why you think you will be able to compete effectively.
• A detailed breakdown of your business proposition, including the premises, production facilities and management systems in place, is important, as well as the skill sets of key members of staff and any historical financial information you have to hand.
• You will also need to put together some financial forecasts for the next few years to illustrate how you see the business developing.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.