When you start a business, there’ll usually be a period when you’re investing lots of time, effort and money before you start making a profit. Before you do this, it’s important to research your market to make sure your customers will really pay for your product or service.
Once you’re confident they will, you can explore sources of funding to help with the costs of starting up your business.
Writing your business plan
If you’re going to need external funding to start your business in addition to your personal finance you’ll need to prepare a business plan. This will explain what products and services you offer, what potential revenue there is, what sets you apart from your competitors and what skills and experience you have to start and grow the business. It will also include financial projections highlighting how much funding you’ll need at what time and what this money will be spent on. You need to research and understand how you can turn your idea into a viable business before you invest lots of time and money. Your plan will be helpful to convince other people of the value of your business.
You can download free business plan templates and find help and advice on how to write your business plan here:
Financing your start-up business
The most suitable finance option for your business depends on many things, including:
- how much funding you need
- your current business revenue or if you’re a new business your potential revenue
- whether or not you’re willing to offer personal assets as security – this can make it easier to get funding but is risky if you’re not able to maintain payments
- whether or not you own a business property – this can make it easier to get funding
- whether or not you’re willing to sell shares
A loan is credit that you borrow and repay over an agreed length of time. Banks, community development finance institutions, other businesses and even friends and family can provide businesses with loans. As well as repaying the amount you’ve borrowed, you normally have to pay interest on a loan. The amount of loan and interest you pay will depend on:
- how long you need the loan for
- how much you borrow
- whether the loan is ‘secured’ – eg if you own your home and agree to transfer ownership to the loan provider if you don’t keep up your payments
- other factors, like the Bank of England base rate
Investment finance (also known as equity finance) refers to the process of raising finance through the sales of shares in a company, in other words selling part of your business (‘shares’) to an investor. The investor will take a share of any profits or losses that the company makes.
Private investors may expect to be able to take advantage of the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS). These schemes are designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.
Peer to peer lending and crowdfunding
For most businesses the first port of call to seek financial support is likely to be the banks and other established financial institutions, however, over the past few years, there has been a significant growth in the area of peer-to-peer lending and equity crowdfunding.
Peer-to-peer lending (also known as person-to-person lending, peer-to-peer investing, and social lending; sometimes abbreviated as P2P lending) is the practice of lending money to unrelated individuals, or “peers”, without going through a traditional financial intermediary such as a bank or other traditional financial institution. This lending takes place online on peer-to-peer lending companies’ websites using various different lending platforms and credit checking tools. These peer-to-peer lending sites match up savers, who are willing to lend, with borrowers – either individuals or small businesses.
More information about crowdfunding:
Peer-to-peer lending sites include:
Cashflow/Profit & Loss
It is important to understand cash flow and profit & loss. A business may sell a product or service at a price that shows a profit for the business. However, if you give credit to your customer you will not receive the cash until a later date; if in the meantime you need pay bills in excess of the cash you have, you will be unable to do so and risk “overtrading”, a situation where company is growing its sales faster than it can finance them. This can lead to a lack of working capital to finance operations.
Cash flow is the net amount of cash moving into and out of a business. Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges. Negative cash flow indicates that a company’s liquid assets are decreasing.
A profit and loss statement (P&L) is a financial statement that summarises the revenues, costs and expenses incurred during a specific period of time, usually a fiscal quarter or year.
A small or medium-sized business raising equity finance through private investors should seek advice about Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS). In order for investors to be able to claim, and keep, SEIS or EIS tax reliefs relating to their shares, the company which issues the shares has to meet a number of requirements. The company must satisfy HMRC that it meets these requirements, and is, therefore, a qualifying company.