Your Guide to Funding Your New Business

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If you have an idea for a business, and are in the planning stages to see if you could make it work, then one key consideration is finances. All businesses need some kind of money to get started. For some, it might just be a laptop and software to start an online graphic design business. For others you need much more money to get started, to buy inventory, warehousing, office rent, and more. But what are your options, especially if you’re not sure how much money you will need in order to get the business started?

From unsecured business loans, credit cards, business bank loans, friends and family, personal investing, and crowdfunding, there are a number of options available to you. You need to know what is going to be best for your business, though, as you need to have a plan to either pay money back, or to give people a share in your business. So what is going to be best for your business?

It is important to ask yourself the following questions when planning your new business:

  • What is the best way to be able to finance my business?
  • What are my options and who do you turn to to get money?
  • Is it possible to borrow money when the business isn’t even up and running?
  • Are small business loans possible when there is only a business plan?

If you want to know the answers to these, then read on, for the guide to financing a new business.

What is the best way to finance a new business?

There are eight typical avenues to go down when it comes to financing your business. One of the first is personal investment. If you don’t need a lot of money to start with, then you could put in your savings to get things started. The second is to call on the bank of friends and family, which they could lend you, if you’re unable to put in some money of your own. Business loans from a bank, and specific startup loans are other options too. These can have long application processes as the lenders will want to see clear business plans in place, so that they know they’ll be able to make some of their money back at some point.

As well as business loans, there are some local authorities that will offer business grants. This may be government issued or otherwise, but means that it is not repayable (beneficial when starting out). Other options for you can include peer-to-peer lending, angel investors, and crowdfunding are also available, where money is provided in exchange for owning a portion of your business. This can be a good thing, as they don’t want their money back, but you need to be able to guarantee them some kind of return on their investment. Crowdfunding is often better when there is already an established business. People won’t know who they’re investing in if your business is brand new. 

The good news, though, is that there is no ideal or best way to think about financing your business. You need to decide what is going to be best for you. If you don’t want to have to give away any equity in your business, then that won’t work for you. If you need a significant amount of cash to get the business started, then friends and family or personal investment is likely to not work. So think carefully as you are planning your business, and be realistic about what you need, what you expect, and how flexible you can be.

Personal investment

If you are thinking about investing your own money into your business, then consider the following:

  • Have money separate. Keep personal funds and business funds in different accounts so they don’t get mixed up.
  • Make the process as simple as you can, with one larger sum upfront if required, rather than lots of little small amounts.
  • Think about the risks that come with investing your own money, as they may not be a guarantee that you’ll get it back
  • Protect your assets, so that your home, for example, won’t be taken away if you get into financial trouble with the business.

Friends and family

If friends and family are keen to help, or you’re thinking of asking them, here are some things to consider:

  • Get straight to the point about what they can offer, in terms of how much, when (or if) they want it back, and if they would charge you an interest rate.
  • Although they’re friends and family, business can change things, so keep it formal with a written contract detailing the loan.
  • Are they looking for anything from the business, such as equity?
  • Be clear with them on whether this is an investment, a loan, an interest-free loan, or a gift.

Bank loan

When it comes to being a new business, you need to check if you’ll be eligible for a bank loan, with only a business plan to show them. On paper, you can get this, but it can be a little more complicated. Banks tend to prefer an already established business to loan money to, as they want to see that they will get their money back. Many banks also prefer to lend to a limited company, rather than a sole trader, as there is a little more security with that. If you find it hard with a traditional bank business loan, then there are other options for brand new businesses.

Startup loan

Startup loans have been created for brand new businesses, as they have no way to show how well they have been doing as a business, and only have a business plan to show. In order to get one, you will need to write a plan for your business, as well as have some realistic financial projections to share with them. It can also be wise to show that you are being mentored by an already established business person, who can give you advice along the way. If this is possible, then let the loan company know.

Peer-to-peer lending

This kind of borrowing is similar to a traditional loan, but the difference is where the money comes from. P2P money comes from individuals, rather than a bank, and they do this in order to get a good financial return on their investment, compared to them having their money in a bank. Of course, there are still risks for the lender, but if it pays off, then it can do so well. As a borrower, there isn’t much difference between this and a standard loan, but with some lower interest rates, it can appeal. 

Business grants

This can really depend on what kind of business you have and where the business is located. Often these grants mean you don’t have to pay anything back, but there will be a lot of paperwork to qualify for one. They tend to be for businesses that have been created to solve an urgent problem, or meet a particular demand, or can improve something like social mobility. 

Getting and applying for a grant is something that is competitive, so don’t pin all your hopes on it. You just need to be prepared and ready to state the case for your business. Be able to show why your business should qualify and have some evidence to support your claims.

Equity investment

Equity investment is where you get an angel investor or a venture capitalist who can give you the finances that you need, in order for a share in your business (think along the lines of Shark Tank). You can get the cash that is required, and often the input and support from the lender, as they are usually successful in business in their own right. This is the kind of investment that is usually highly sought after and it can be competitive, but if you have a stellar business plan and plan of action, then there is no reason why it couldn’t work for you.

Crowdfunding

Crowdfunding is a relatively new way of funding your business, and for many businesses, it has brought some real change to the world and means many businesses have got off the ground that never would have been able to otherwise. Crowdfunding not only gets money for the business, but it helps to get your name out there and increases your profile. By doing this, especially with social sharing, you can reach like-minded people who are passionate about the same things you are, and can get some new and loyal customers quickly. It can be tricky for a brand new business to do it right away, so it could be worth considering for something in particular, when your business is already established. 

There is no right or wrong way to fund a new business. It is all about deciding what is right for you, and what will best fit your business plans. Just be fully aware going into any loan or investment, to know what is on offer and what the expectations are.

 

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