Are you ready to start your own business?

Recession is a breeding ground for entrepreneurship. Disillusioned employees faced with the prospect of redundancy or pay freezes are often tempted to quit the day job and go it alone. Apple and Microsoft are just two of the global success stories that sprang to life in the wake of torrid economic times.

According to the British Bankers' Association, around 50,000 new businesses have been set up in the UK every month since October 2008.

While the creation of new enterprise is encouraging, times remain tough. Figures from accountancy firm BDO Stoy Hayward show that last year 26,196 UK businesses failed – a record high.

In truth, there is never a good or bad time to start out. In times of steady economic growth there is more work and more readily available capital, but there's also more competition. In tougher times, the reverse is true.

What really matters is the strength of the idea on which a business is based. Every entrepreneur knows there is a very fine line between success and failure and that preparation is key to success. And the most important thing to prepare is a business plan.

A robust plan must demonstrate the business owner's knowledge and understanding of their product or service and the market it operates in. It should also prove that the proprietor has thoroughly researched their potential customer base and is fully aware of the competition.

But of course, capital is the lifeblood of any business; necessary for income generation and growth. In the early stages of a company's life, outgoings usually exceed income but working capital has to come from somewhere.

When savings run dry and loans from friends and family dry up, entrepreneurs must turn elsewhere for investment. And in the current economic climate, that's not always easy.

BBA figures reveal that the monthly average of "new term lending" to small business by the banks fell by nearly 11% to £564 million in June 2009, compared to a year earlier. But it's not all doom and gloom. There are still ways for start-ups to secure investment.

Business loans

The Enterprise Finance Guarantee, overseen by the Department for Business, Innovation and Skills, helps small to medium-sized companies secure bank funding. It does so by guaranteeing up to 75% of lenders' exposure on individual loans.

The scheme supports lending to viable businesses with annual turnover of up to £25 million, which are seeking loans of between £1,000 and £1 million.

Proweld Engineering Services, based in Ellesmere Port, secured £350,000 from its commercial lender Lloyds TSB through the EFG scheme earlier this year. The loan enabled the company to cover its initial outlay for materials and labour needed to service its biggest-ever contract. Proweld is now on the way to achieving turnover of £5 million within the next 12 months, up from £2.3 million last year.

However, Dr Bevis Watts, head of business banking at the UK's largest ethical bank, Triodos, encourages businesses to look beyond the high street for finance options.

"Among the main commercial banks lending remains tight, but at Triodos our lending has grown by 20% this year, with three times that amount in the pipeline."

Triodos is a specialist financier, lending only to businesses with a social or environmental focus and typically within sectors such as renewable energy, food and farming, social enterprise and arts or culture.

Dale Vince is the founder of Ecotricity, a green energy provider which invests the money it makes from selling electricity into clean forms of power such as wind energy. His company secured specialist funding for around £300,000 from Triodos to build its first windmill.

"I tried the Big Four. They had no idea what I was talking about really and little interest in lending to a hippy with crazy-sounding ideas. Triodos was the opposite; they understood wind and they were willing to put faith in me to build it and make it work," says Vince.

"Since then, we've built another 50 windmills across the UK. And we now supply green electricity and gas to more than 40,000 homes and businesses in the UK."

Equity finance

But if you'd rather bypass the banks altogether, another option to consider is equity finance. This is where entrepreneurs raise share capital from external investors in return for a share of the business - either through shared ownership or a share of future profits.

This type of investment is usually appropriate for companies whose business models deter providers of debt finance – i.e. the banks – because they can't afford to pay loan interest while using the cash for core activities or funding growth.

According to the business advice service Business Link, the benefits of obtaining capital in this way include not normally needing to pay interest on the original investment, or having to repay by a specific date.

Because equity investors share the risks a business faces, their return depends on the growth and profitability of the business.

And due to the risk to their funds, they normally expect higher returns than they would for safer, more secure investments. They are also likely to expect to be able to monitor progress and to be involved in significant decisions.

The main providers of equity finance for private businesses are venture capitalists and business angels – serial investors, often successful entrepreneurs themselves. This is why these investors are often credited with bringing "smart" money to a business: cash plus expertise and contacts.

Julie Meyer is chief executive of Ariadne Capital and a dragon on the BBC's online Dragon's Den. She offers this advice to entrepreneurs seeking investment for the first time:

"Be prepared with a presentation of the investment opportunity – 10 key slides and a demo if appropriate. Practice your pitch, and write down the questions you anticipate investors will ask. The more you rehearse the better."

All sound advice, but what exactly does a dragon look for in the den? "When considering an investment pitch, I am assessing an entrepreneur's drive and confidence," explains Meyer.

"I try to infer how persistent they will be and how strong of character they really are. What have they done without the luxury of other people's money? When they present the assumptions which drive their forecasts and business model, do I agree with them? I'm trying to understand them as people as fast as possible."

With an increasing number of start-ups chasing limited funding, it is imperative that entrepreneurs convince would-be investors of their reliability. "Financiers will want to be certain they'll get their money back; so make sure there are no holes in your [business] plan that might convince them otherwise," says Watts. Essentially, you need to ensure your business plan is watertight.