The idea behind starting up your own business is likely to be an exciting one – breaking away from the 9am to 5pm routine can be a thrill, even if it does mean your days will become 8am-10pm instead!
It’s often less of a thrill to think about finding investment though – you’re bringing someone into your business who might not know you – and might not share the same hopes and dreams you have for your new venture.
The good news is, whether your a small company that offers commercial cleaning services in Glasgow or a new online retailer there are lots of alternative ways of finding captial.
We’ll walk you through the most common options, as well pointing out some pros and cons of each.
Despite issues that still hangover from the 2008 banking crisis, banks are normally the number one source of new business finance.
Be warned though, banks won’t just lend to any new startup business – they’ll want to see a detailed business plan before they even consider issuing any credit facilities. There are a host of business plan formats available – and banks will sometimes even issue their own to ensure you’re providing all the relevant information.
It’s also worth noting that if you’re applying for bank finance with an untested business model – the bank might insist on credit checks for all the company directors involved. Although setting up a limited company won’t impact your personal finances, consulting with credit referencing agencies does give the bank an indication of your financial conduct.
Assuming the bank is happy extending credit – it will normally come in the form of two products – a loan or an overdraft.
A business loan will normally be offered over anything from 2 to 10 years. Typically, loans will either track the current base rate – or be a fixed rate. Fixed rate products are often favoured as it offers your business a predictable monthly sum that will be repaid – and, assuming this payment is adhered to, a predictable timescale in which your company will be free from debt.
On the other hand, a business overdraft is seen as a slightly more flexible solution. Rather than taking a chunk of money upfront, you need only borrow what you require – and since you only borrow what you need, you only pay interest on what you need. This flexibility isn’t without risk though – with no contracted repayment schedule you bank can potentially withdraw the facility at any time – meaning a loan can often be a more dependable option.
Finance from friends and family
Although the old adage claims you should never mix business with pleasure – research conducted early in 2017 found that over 60% of new small businesses relied on finance from friends or family to get themselves out of the starting blocks.
There are some significant advantages that go with borrowing money from your nearest and dearest – not least the interest rates that are typically charged – often 0% – with just the understanding that money will be returned in due course.
It’s not only favourable rates that make borrowing from family so attractive though, where with a bank you’re expected to submit detailed plans and can expect credit checks, family and friends are far more likely to lend based on existing trust, both in your creditworthiness and your business plans.
While borrowing from people you know is likely to offer some significant advantages over using a bank, it is important that you borrow on a completely understood and transparent basis. You might be told ‘not to worry’ about creating a payment schedule or putting pen to paper with the conditions of the loan – but without this, unforeseen disputes can become tricky – with the truth around the initial arrangement becoming confused or twisted.
Insisting on some formality keeps everyone protected – and avoids any unexpected claim for part of the business when you start making your millions!
Peer to peer and crowdfunding
Websites like GoFundMe, Kickstarter and Crowdfunder have seen an explosion in the popularity of peer-to-peer financing. The criteria of whether or not you can apply for funding differs from site to site – but generally speaking, virtually any company can look for funding this way.
Like borrowing from friends or family – you have the advantage of not having to go through the sometimes-arduous process of dealing with a bank – however, that’s not to say that you won’t be free from charges. The most popular websites that facilitate peer-to-peer funding charge anywhere between 4% and 7% of the money raised – which can be a sting if you haven’t accounted for it from the very beginning.
Repayment of peer-to-peer lending also depends on the type of site you’re using. On occasion, you may be able to avoid repayment altogether (and in a perfectly ethical way!) by offering the lenders a product or service in return for their investment. If instead your lenders will be expecting a return on their cash – the rates are traditionally very low.
Government grants and loans
While he idea of ‘free’ money from the government might seem completely alien – there are many of these grants available, servicing different niches in the market.
Although, if you think the process of applying for a grant or a low-cost loan is going to be easy – you’ve got another thing coming! Grants do not have to be paid back – but you can expect an extremely long process before you see any cash – and in some instances, a wait that can go on for months.
The application for both a grant and a loan is likely to involve an extremely in-depth business plan being required – so if you’re going to look toward the government for some capital, you’re also going to need to dedicate a lot of time to seeing the process through properly.
Finding government grants and loans is typically a lot easier if you’re younger – with numerous initiatives in place to ensure 18-30-year olds are given every opportunity to launch their small business with the maximum amount of support. It’s not easy working out what you’re entitled to apply for though – so if you’re not sure, consider using an online service or consulting the .Gov website to begin your search.