Start-up businesses will require finance before they start trading to establish their business premises, cover staff wages, buy equipment and cover other costs such as marketing.
A start-up must identify how much finance it will need and when. This should be sufficient to cover the first six months of trading.
A business plan will make it easier to raise finance. It should outline how the business will operate in the future and include financial forecasts showing how much funding will be needed for specific items and when the money will be required. It will also show potential lenders or investors how their investment will be repaid.
Start-ups should consider the following finance options:
Business angels are common forms of finance for start-ups, often providing between £25,000 and £750,000. This type of investment is common when an early investment capital is required and when a business needs more than money. For example, perhaps you are trying to enter a new market and a business angel with relevant contacts or experience would be very useful.
Choosing the right type of angel for your business is therefore very important. The British Business Angels Association is a good place to start (see 'Related links').
If used sensibly, business credit cards help bridge short-term funding gaps and manage expenditure. In this case short-term means under 30 days.
Friends and family form a vital function in many start-up businesses. They are generally a quick and straightforward way to secure the funding needed, with funds usually provided over a fixed period of time. Recent surveys have suggested that one on ten businesses uses close friends and family as bankers.
Grants are usually available for specific projects - for example a new product or process, job creation or training programme. They typically provide between 15% and 60% of the cost of the project. The normal growth of a business would therefore not normally qualify for a grant, though an established business looking at creating more jobs could qualify.
Loans are frequently used to finance start-up capital and also for larger, long-term purchases. They are generally a quick and straightforward way to secure the funding needed, and are usually provided over a fixed period of time.
Overdrafts are often used by small and medium-sized enterprises (SMEs) to ease pressures on working capital and as a back-up for unexpected expenditures. They are a form of finance for businesses that experience fluctuations in working capital.