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Guide to Start-ups Step 4: How to finance your new business

Making sure you have enough money to set up and run your fledgling business is essential. Whether you’re a freelance writer or you’re opening a shop, you need to make sure you have the finances in place to make your fledgling business survive and grow.

Start-up costs can be expensive and it’s normal for most businesses not to be profitable straight away. That’s why it’s important to be realistic and err on the side of caution when planning your finances. While there’s no one-size-fits-all answer to this, by getting a clear understanding of what you have and what you will need is an important first step.

Our step-by-step guide should help get you started and hopefully may highlight areas you haven’t considered.

 


How much money do you need?

First, consult your business plan and work out a budget. How much money do you expect to make each month? How much money will you need to spend to purchase the necessary equipment or stock?

Next, think about contingency. If your business is reliant on seasonal income, how will you keep it afloat in the less profitable months?

Consider the worst case scenario and forecast for that. If you’re planning to apply for a loan, it will be important to demonstrate that you have taken contingency into account and that is factored into the loan amount you request.

What kind of investment is most suitable?

Once you have an idea of funding requirements, you’ll then need to work out the source. To cover the costs of starting up and developing, you may require investment finance. Potential sources of capital may be:

NB: Before taking the plunge, it’s worth seeing if you are eligible for financial support through government schemes, trade associations or charities. There are financial resources open to exporting, technology and training in particular.

How much capital can you afford to invest?

Now’s the time to look into any savings you might have and see how much capital you can get together.

Should you own a property, you might want to consider taking out a mortgage, which you can then loan to your business. Mortgage rates are generally lower than business lending rates and can have more flexible repayments. Of course, the key drawback is that it puts your property potentially at risk.

If your family or friends are open to investing, advise them to only invest sums they can afford to lose, make them aware of worst case scenarios and then put the terms of agreement into writing to avoid any potential misunderstandings.

If you can provide a viable business plan, outside investment is another option. Investors may ask you to give up a percentage of your business but the trade off is that they may be able to bring valuable experience to the table. They might also expect high value returns from their investment.

The UK Business Angels Association may be a good place to start as they can offer investments between £10,000 and £250,000. For larger investments, look at venture capital check out British Private Equity & Venture Capital Association. Smaller investor networks include UK Crowdfunding.

Tip: When setting up fashion brand Henri, Henrietta Adams was able to receive funding and support from a new business fund, so it’s certainly worth checking to see if there are any schemes running. For her further insights, check out Henrietta Adam’s start-ups advice.

Next – Step 5: How to make sure you’re ready to start your business
Previous – Step 3: How to choose your business structure