Raising Finance for Start-Up Businesses

For some it has meant swapping the office desk for the kitchen table; for others, the additional time we’ve spent away from the workplace has provided a golden opportunity to re-evaluate the way we spend our working lives.

In recent weeks, as more parts of the economy begin to reopen, growing numbers of people affected by furlough and redundancy have started to explore self-employment as a career option. One of the most difficult challenges many new entrepreneurs face is financing their business ideas. In this article, Gillian Pickard, a start-up finance specialist at Doncaster-based Finance For Enterprise, looks at some of the options available to new business owners when it comes to raising money for your business, and the steps you should take to improve your chances of securing the funds needed to build and grow your business. 

Is now the right time to launch a business?

Many of us like the idea of being our own boss. Taking control of your own destiny, setting your own work routines and being accountable only to yourself can be incredibly appealing. It’s perhaps unsurprising that, in recent weeks, growing numbers of people have considered leaving their old work routines behind and taking a step into the world of self-employment.

Becoming an entrepreneur takes drive and determination to succeed, but is there such a thing as the perfect time to start a business? 

If you’re thinking now is a good time to do just that, you’re in good company: Disney and Microsoft both opened their doors during times of global economic uncertainty. And they aren’t alone.

According to some experts, businesses that open their doors during a downturn tend to be more resilient, adaptable and flexible to change than those that open during the boom times. Also, small businesses are often quicker to seize new opportunities than their larger counterparts. 

Before we get too carried away, though, perhaps I should offer a word a caution. Nothing is guaranteed in the world of business. 20% of all small businesses will never see their first anniversary. 30% of those that survive their first year will fail in their second, and more than half will close their doors before they reach their fifth anniversary. 

There are many reasons why businesses fail, but one of the most common is a result of cash flow pressures. 

Late payments, increased overheads, and simply failing to have the right systems and processes in place from the outset can all contribute to a business’s failure. In many cases, new business owners simply don’t have access to the vital finance they need during their formative years and this can stifle the business from day one. If you take one piece of advice away from reading this article, it’s this: do your homework and spend time planning what your business will look like, i.e. the amount of money you will need to launch your business and also earn a comfortable living from it. 

Planning your business

When it comes to planning your business, you must think of the different challenges and opportunities your business will encounter. Spend time thinking about what your business will look like, how it will generate an income, and have a clear grasp on your finances before you even consider opening your doors. 

One of the first things you should consider is the amount of money your business needs to generate to allow you to earn an income from it. Depending on the type of business you plan to launch, you may need to invest in raw materials and equipment before you generate an income for your business. This may mean funding these purchases with your savings, or trying to obtain finance from other sources. 

When it comes to applying for finance, most lenders will expect to see your application supported by a well thought out business plan. Within your business plan you should cover:

• The products or services being sold by your business

• Competitor analysis

• What differentiates your business from others offering similar services

• How you will attract and retaining customers

• How your business will grow and develop

A business plan is one of three documents you will need to create, alongside a cash flow forecast and a personal survival budget, if you plan to apply for business finance. These documents will typically determine whether a funding application is likely to be successful. 

Whether applying for finance or not, it’s good practice to start your business journey by sitting down and mapping out your ideas.

Why do I need a cash flow forecast?

Cash flow forecasts will help you identify the amount of money your business generates, as well as helping to highlight any potential shortfalls in your business’s finances. 

If borrowing money to support your business be aware that almost all lenders will expect a lending application to be supported by a cash flow forecast, which should show the impact a loan will have upon the finances of the business.   

You should think of your cash flow forecast as a working document. A well-developed cash flow forecast can even help you monitor the performance of your business as you begin trading, and can even help you when it comes to preparing your annual accounts, by comparing your projected financial predictions alongside your actual revenue. 

You can download a cash flow template here: https://www.startuploans.co.uk/cash-flow-forecast-template

Generally speaking, cash flow forecasts focus on three areas that are likely to affect the performance of your business: 

• Sales income

• Fixed costs

• Variable costs

Fixed costs relate to payments that your business will incur regularly, but which remain the same. Examples of fixed costs may include renting premises, loan repayments and insurance premiums. Variable costs will fluctuate from month to month and are likely to change depending upon the output of your business; for example, raw materials, sales commissions and utilities. 

Creating a survival budget

When launching a business, you shouldn’t simply look at your finances in isolation. Just because you’ve launched a new business doesn’t mean that demands on your bank account, such as living expenses, will stop. If you don’t plan to draw money from your business during its first few months of trading, you will need to ensure you have enough money to cover your living costs.  

If your business cannot generate enough income to support your lifestyle, especially during its first few months of trading, you need to be confident that you can meet any existing debts. 

Survival budgets should reflect the amount you will need to draw from your business to cover your living costs and existing financial commitments; for example:

• Rent/mortgage payments

• Credit cards and loan repayments

• Utilities and council tax

• Insurance

• Food

• Vehicle running costs

• Entertainment

You can download a free personal survival budget template here: https://www.startuploans.co.uk/personal-survival-budget-template/#:~:text=A%20Personal%20Survival%20Budget%20calculates,final%20Start%20Up%20Loan%20application.

Will my business be able to raise finance?

New entrepreneurs can sometimes be left frustrated and disillusioned when they discover their bank doesn’t share their passion or vision. Most lending decisions are based upon the probability of a loan being repaid in full and, to many lenders, an unproven business with no previous trading is a risky investment.

However, this doesn’t mean your business idea isn’t viable, it just means you may need to explore alternative ways of raising finance. There are a number of different ways in which new business owners can access funding, and some lending products are designed specifically with the needs of new business owners in mind. 

Raising finance can often help you achieve your business goals more quickly, but it’s a decision that should be taken for the right reasons. The most common reason why new entrepreneurs look to secure borrowing for the business is to help cover the costs of starting the business, as well as helping to assist with cash flow during those all-important first few months of trading. 

It’s worth remembering that if you are planning to borrow money for your business, it will need to be repaid. It may sound like common sense, but I’ve met plenty of ambitious entrepreneurs who fail to consider the costs of servicing a lending agreement when preparing their financial forecasts then wonder why their business is struggling!

What sources of funding are available to support my business?

There are a number of avenues you may be able to explore to raise funds for your business:

• Grants

Unlike when you borrow money, if your business is fortunate enough to be able to secure a grant, the amount awarded does not need to be repaid. However, it’s worth noting that you may be asked to produce written evidence to confirm how the money has been spent and the impact it has had on your business. A list of business grants available can be found here: https://www.gov.uk/business-finance-support 

• Friends,  family and personal finance

One route that is commonly used by new business owners is to draw on their own resources to support their business idea. Although it is possible to use a personal loan or even credit cards to prop up the finances of your businesses, this practice can be frowned upon by lenders. In many cases, high street lenders place restrictions on how personal loans can be used, meaning they cannot be used for business purposes. 

Approaching friends or family may be another way to raise the funds your business needs. There are pros and cons to all types of lending arrangements; borrowing money from friends and family may reduce the overall costs of borrowing, but before you start tapping up your relatives, think about the consequences if you fail to honour any agreed terms. 

• Business loans

Securing business finance is a tried and tested route for businesses of all shapes or sizes. However, for new businesses with no proven track record, it can be difficult to access finance from traditional lenders. 

An alternative is securing funding via Start Up Loans UK – a Government-backed scheme designed specifically to support new business owners. Finance For Enterprise is a delivery partner for Start Up Loans UK and we will help you prepare your application.  

How do Start Up Loans Work?

Unlike other forms of business finance, Start Up Loans are designed specifically for new businesses. In addition to securing financial support, you will also gain access to a range of different events and mentoring support to help you build your business. 

Am I eligible and how much can I borrow?

Start Up Loans are designed to support new business owners who are thinking of launching a new business (these are known as pre-start businesses), or companies that have been trading for less than three years.

You can borrow between £500 and £25,000 through the Start Up Loans programme. The amount borrowed is typically repaid over three years. 

How do I apply?

As a delivery partner for Start Up Loans, Finance For Enterprise will discuss your lending requirements and guide you through the application process. To find out more about start up loans, call 0333 014 3455.

What will finance providers look for in my application?

As a new business with no previous trading history, finance providers will assess your application based upon:

• The content of your business plan

• Confirmed future orders

• Experience and knowledge of the business owner, such as previous industry experience or transferrable skills

• Your cash flow forecasts and personal survival budgets

Working with an investment manager will help ensure the documents you provide to support your application contain the key information needed to help lending providers make an informed decision.