Raising money has always been tough for creative start-ups and small businesses. If you’re good at begging, borrowing, DIY and sharing resources, you might be able to get by without a lot of money for the first few months of your enterprise.
But if your business really does need money, here’s a short introduction to some of the ways you can finance it.
You should consider not only one-time start-up costs but also cash to remain open for business: everyday expenditure on new stock, raw materials, hiring employees, and so on.
In many ways, the best source of cash for any business is sales income. Also, if you do decide to look for outside funds, a good sales record is a sign that you actually have a business, not just an idea. As a business develops, profits can be used to finance further expansion or to pay for other trading costs and expenses.
If you are unsure which sources of funding to use, consider taking advice from an accountant or solicitor.
Personal sources of finance
These are the most important sources of finance for a start-up – certainly in the case of a sole proprietor. They include personal savings, borrowing money from friends and family, and personal credit cards.
Personal investment sends a strong signal of commitment to outside investors. If borrowing from family or friends, it is important agree in writing the basis of the loan and terms and conditions as to repayment, interest etc. If the business is set up formally e.g. as a company, investment may be in the form of subscribing for shares rather than a loan and the share ownership then determines who controls the business.
Using credit cards has become surprisingly a popular way of financing a start-up. This source can provide access to a limited credit-free period of no more than 30 days but thereafter becomes very expensive.
Designers and artists may be able to apply for grants or prizes offered from time to time by public bodies such as the Arts Councils or Crafts Council or by companies.
It may also be appropriate to research commissions available from public bodies. Sources of information include a-n and Artquest but there may be many other routes depending on the type of work you can provide.
A bank overdraft is a more short-term kind of finance and is also widely used by start-ups and small businesses. An overdraft is when the bank lets bank balance go below zero and in return charges a high rate of interest. It is a flexible source of finance, and is excellent when the business runs into short-term cash flow problems.
Banks and other providers offer various forms of asset financing, i.e. providing the funds to acquire assets for the business. If you don’t repay the loan, the lender can then sell off the assets to recover their losses.
Unsecured bank loans
An unsecured longer-term bank loan is suitable for financing investment in fixed assets or other expansion of the business and generally at a lower rate of interest than a bank overdraft. The agreement will state the period over which the loan is provided, the rate of interest and the schedule of repayments. The bank will usually require some security for the loan. If the company does not have suitable assets, the bank may seek personal guarantees provided by the entrepreneur. However, this exposes the entrepreneur’s personal and indeed family assets and is not to be accepted without careful thought and professional advice. If your business is established and has real prospects for rapid growth, other forms of finance may come into play.
Some businesses use factoring to manage their cash-flow and handle problems caused by customers who pay late. Factoring companies will, for a fee, provide an advance on income due from products or services which you have already invoiced, and they collect the money due from your client or customer.
Business angels are professional investors who typically invest between £10,000 and £750,000. In addition to their money, Angels often make their own skills, experience and contacts available to the company. Getting the backing of an Angel can be a significant advantage to a start-up, although the entrepreneur needs to accept that some of the equity of the company will be owned by the Angel with a possible reduction or even loss of control of the business.
Business angels may be interested in specific types of products or services. On the whole, they are unlikely to invest in a start-up unless it has very special potential in their field of interest. A good route to finding angels is through business angel networks, like the British Business Angels Association.
Venture capital is a specific kind of share investment that is made by funds managed by professional investors. Venture capitalists rarely invest in genuine start-ups or small businesses. They prefer to invest in businesses, which have established themselves and need several million pounds of investment to accelerate substantial growth of profits.