Chapter 8 - Financing your New Business

You have all the research at your disposal and you have incorporated your findings into a business plan. In this chapter we summarise the most common options available if you should need financing in order to start your business. Lets look at what works well for you.

There are multiple options available to you as a business owner with a solid business plan. But you should be aware that your business needs to sustain whatever option you decide on, i.e. include repayments into your cashflow forecasts.

Bootstrapping Finance

Bootstrapping is the term used when you introduce some of your own assets to fund the business such as using some of your savings if you have any or selling an asset that you already own. The advantages of doing this is that at the start of your business ideally, you do not want to be paying regular payments to a banker in interest and capital payments for a loan. The downside is that it is at your own risk, if your business doesn't thrive and actually fails, your savings are not guaranteed to be returned i.e. your cash injection is at risk.

Credit Cards

Credit Cards can offer convenience for businesses that need a way to charge expenses and pay them off later, which could be ideal for a new small business.

If you need a credit card for financing a start-up business, make sure you apply for a business card if you can, rather than using a personal card, as mixing business and personal expenses can make your bookkeeping messy when calculating business taxes.

But read the fine print. Specifically, pay attention to:

• Regular and introductory APRs for purchases and balance transfers

• Annual fees

• Rewards program -  there are plenty of credit cards for financing businesses that can pay you something back in the form of points, miles or cash back. 

• Other benefits, such as premium travel benefits or shopping protections

The better your credit score, the better your odds of your application being approved and getting a low interest rate. 

One word of caution about using credit cards for financing a new business.

When you need money fast using a credit card is an easy and tempting method but the fees and APR you might pay can make it an expensive financing option. So it would be the best option to only use your card for business purchases and look elsewhere if you need cash. 

Family and Friends

If you don't have savings to use or you really do not want to use a business credit card, asking friends and family to back your business is something you might consider.

The advantage of asking friends and family to invest in your business is that they may offer you better terms than a lender. For example, your parents might loan you £20,000 interest-free. You would not find a better deal from any other lender.

What you have to keep in mind when borrowing from people you know is how likely your business is to take off. You could run the risk of not being able to repay the loan and that could damage your relationships. If you use this method of financing your business make sure you cover repayments in your cashflow forecast.

Loans

Borrow from a reputable financial institution is a more traditional option for how to finance a new business. The great thing about a loan is that there are so many different options. You could look into:

• Short-term loans

• Long-term loans

• Development loans

• Equipment financing

However, if you have a brand new business, it may be more difficult to qualify for a loan than other methods. You may have difficulty getting a term loan from a bank but an online lender may be more flexible in offering finance to your new business. 

With a loan, you’re getting a lump sum of money that you can use to fund your business. You then repay the loan according to the terms set by the lender. 

Line of Credit

A business line of credit, on the other hand, can be a revolving credit limit similar to a credit card. You draw on your line of credit when making purchases for the business, then repay those amounts as per the terms from your supplier. As you make monthly payments against your balance, you free up available credit that you can use again for future expenses. This could offer more flexibility when financing a start-up, plus interest is only paid on the portion of your credit line you’re using, if any. 

Business Partner

Introduce a business partner is another option to introduce a capital investment into your business. There are advantages of doing this in that it is not charging you interest and the cash injection can be used for any business related purchase. However, you need to consider the following when considering a new partner:-

• How and when the capital will be repaid

• Is the person partnership material?

• What role will they be expected to fulfil and how much decision-making responsibilities will they have?

• You will need to inform any existing lenders of the change in ownership

• You will need a partnership agreement that is fit for purpose

• Agree on profit sharing

Final word

There are other, less traditional, methods of financing your new business such as crowdfunding that you could explore, but the methods above are the ones that I would suggest you consider first.

Other Chapters in this series so far:-

Chapter 1   - A Business Idea - Lets Make it Happen

Chapter 2  - Target Your Market

Chapter 3   - Land Your Brand

Chapter 4   - The Price is Right

Chapter 5   - Lets Get Down to Business

Chapter 6   - Its All in the Name

Chapter 7   - Location Location Location

Chapter 8 - Financing your New Business

Chapter 9 - Recruitment

Chapter 10 - Law and Taxes: Play it Smart, Stay Sharp

Chapter 11 - Kick off Your Business with a Bang

Chapter 12 - Financial Review for your Small Business

Look out for the next chapter.

The Lead Coach is always available should you need any further help with your new business. Just fill in the contact form on my website www.theleadcoach.biz