There are many sources of finance out there to help startup businesses. Below are some of the main ones.
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Family &/or Friends: Well without explaining the obvious; this involves borrowing funds from family and/or friends.
- Having the burden and thought of waking up every day and knowing that you owe family and/or friends money.
- If your business isn’t as successful as you planned it to be, conflict could arise between relationships.
Not my favourite option to borrow money, unless the family and/or friend was in a position to comfortably give away the money and not need the money back.
Grants: This is more commonly known as sum of money given by an organisation, which does not usually need repaying. There are various grants out there willing to give you hundreds if not thousands of pounds to start-up your business.
- For the majority of times, you have to prove to the organisation that your business idea will work by providing them with the following information:
- a detailed project description
- an explanation of the potential benefits of the project
- a detailed work plan with full costings
- details of your own relevant experience and that of other key managers
- completed application forms where stipulated
- possibly a business plan
- Can usually take a few weeks for them to approve the grant.
- May have to attend seminars, however to some people with less business knowledge – this may be a benefit rather than limitation.
Overdraft facilities: This facility allows you to draw more money out than you have deposited in your account. Think of this as a small I.O.U. Many mainstream banks will have business bank accounts that you can open, which have the facility to obtain an overdraft. Overdrafts are generally used to help with short term cash flow.
- Banks can charge extremely high rates of interest rates when it comes to overdrafts.
- If you don’t have an ‘agreed’ overdraft and go overdrawn, most banks will charge you for this – so ensure you check with your bank before you plan to go overdrawn to avoid these unnecessary costs.
Paying ridiculous interest rates for a couple of hundred or thousand; personally I would most definitely leave this as one of the last resort for a source of finance.
Loans: Known as a sum of money that is expected to be paid back with interest. Usually a larger sum of a money than an overdraft. This is generally a medium-long term source of finance.
- Loans from banks tend to have similar high interest rates to overdrafts, however vary the majority of time depending on the financial institution.
- If you don’t keep up with your repayments, the consequences can be detrimental to your credit rating. In serious cases, causing you to incur charges, County Court Judgements, IVA’s or even be declared as bankrupt.
Taking out a loan – you most certainly need a lot of courage and commitment that your business plan will be successful. I would again leave this as one of the last sources of finances for a startup.
Business Angels/Angel Investors: Angels tend to have proven entrepreneurial expertise. Business angels are professional investors who typically invest £10k – £750k. In addition to their money, Angel Investors often input their own skills, experience and contacts into the business.
Venture Capital Investors/Private Equity: Relatively similar to business angels/angel investors, however quite rare to see many. These venture capital investors use funds managed by professional investors. Their minimum investment is usually over £1 million. They prefer to invest in businesses which have established themselves.
- Investors will want a percentage of ownership of the your business. If you are willing to give this up, then this source of finance may be suitable for you.
- Investors will have strict guidelines on which businesses they invest in, thus it tends to be difficult to gain investment.
Great news! If you can get any kind of investor to back you financially, you will find that your business idea is much more likely to be successful with their input. However remember that if they end up owning majority shares in your business (i.e. 51% or more); they will dictate the final decisions made. If you are happy with this, then I would seal the deal before they change their mind!