START UPS – PART II – FUNDING OPTIONS

16/08/2016

In Start Ups – Part I - we spoke of the need to carry out intensive research into your new idea and produce a comprehensive business plan and cash-flow forecast. That’s not just to give you clarity of the direction to take but also to be your primary weapon in your battle for funding. You must have a persuasive argument and demonstrable outcomes to get the finances you need.

So where are you going to turn to for funding at this crucial, early stage of your business? While you may have personal finances sufficient to cover some of the set up costs, equipment needed etc., you need to have cash reserves so some funding for your enterprise before self-sufficiency is vital.

The need for robust numbers is especially important if you are funded by the ‘Bank of Friends and Family’ in order to back up their blind faith in your entrepreneurial excellence.

Banks: Overdrafts and Loan Finance

Although we have cited this first, the sad reality is that since 2008 and especially now, in the current uncertainty following Brexit, banks are less amenable than ever to lending money – and that starts from a low base! If you do approach them, be clear in your mind whether you are looking for an overdraft – usually a short-term form of funding to meet your working capital needs – or loan finance. In either instance, your business plan and financial forecast will be scrutinized closely.

If the banks are convinced by your business plan and agree to fund you, they will want some form of guarantee of repayment which could be a charge over assets or an insurance policy. While your loan is secure providing you maintain payments, overdrafts can be recalled at any time – more so when you most need that financial support.

Loan finance is not cheap –interest is always added and, although the current Base Rate stands at 0.25% you won’t be paying this and that is over the initial set up fees at outset.

Grants

If you are daunted by the idea of high interest rates, you may be look to find grants with no repayment required. These are difficult to find, often project-specific rather than covering the daily costs of administration and management and there is lots of competition.

Friends and Family

It may seem like an obvious place to start is to ask family members and friends to “buy into” your business – literally - but it’s good to run through a few checks and balances beforehand:-

•- Can they really afford to fund your enterprise? •- Are they as passionate about your product/service as you are? If not, is it fair to ask them for their input? •- If things should go wrong, how will those relationships suffer? •- What if one of your investors wants their money back at a time when you are unable to return it? •- How will you structure the funding – a loan (at what rate of interest?) or shares?

If you do go down this route, make sure everything is carefully documented - a solicitor used now could actually save money and marriages.

Crowd-Funding and Peer to Peer Lending

KickStarter, Indiegogo, Patreon…. There are a host of options available if you want to attract an angel investor – someone who likes your idea enough to buy in. Crowd-funding makes use of the easy accessibility to a network of people through social media and crowd-funding websites to bring equity investors and entrepreneurs together.

Peer-to-peer lending (think Funding Circle, Zopa) is a fast and accessible way of getting an injection of cash into your business. The essential difference between this and crowd-funding is that you do not give away any equity, but rather pay interest on the money like any commercial loan - Watch out for a future blog on investor funding.

Creative ways of Funding

Could you re-mortgage your property? Use asset-based lenders? Whatever you decide ALWAYS run your ideas past your accountant or you might find yourself in hot water!

The wise entrepreneur always consults his or her accountants when compiling the business plan and cash-flow. Let them guide you through the funding maze to find the best route for you.