If anything, the financial crisis has prompted many people to think outside the box and take the leap in setting up their own business. But while the prospect of being your own boss or turning that dream into a reality is understandably alluring, building up a business from scratch takes dedication, enthusiasm and a firm belief you have something valuable.
Unsurprisingly, the first thing start-ups need to consider is funding. As the saying goes “money makes the world go round” and it’s certainly crucial in getting a business idea off the ground. Some would-be creators will have been lucky enough to have built up a cash buffer themselves, but others will need to beg and borrow from family and friends to get their business started.
There isn’t a set figure for the level of funding start-up business needs as it all depends on the nature of the business. Those with a high level of infrastructure such as a restaurant will need much more cash.
Unfortunately, while there are certain initiatives and grants in place to help start-ups, there isn’t a great deal of bank finance available. In times of austerity, businesses are likely to require an asset in order to attract bank lending. With out physical collateral, such as property or company vehicles, securing bank lending becomes much harder.
But of course, how do you know how much funding you’ll require if you don’t have a business plan? Budding entrepreneurs need to understand, live and breathe their business and know the numbers inside out. If the aim is to run a small business that provides personal income and is more of a lifestyle business then chances are not much of a cash injection will be needed. However, if the goal is to set up a business, grow it and then eventually sell it, this requires much more funding.
The key to knowing how much is needed lies in the questions – what will the cash be used for and how long before the business becomes cash self sufficient? Investors will want to know the burn rate and will question where continued revenue will come from once the initial funding has dried up. A good business plan with cash flow projections must build in stress testing such as being able to reduce the amount needed by a third to see the bare minimum the business could survive on. Once the numbers have been crunched and crunched again, can the right funding avenue be decided upon.
Financing a business through debt has become much more difficult in today’s environment and this is where angel investors and crowd investment has really come into their own. Earlier this year, financier Nicola Horlick raised an impressive £150,000 in less than 24 hours via a crowdfunding site. These sites are designed to connect financial backers with budding business minds and this phenomenon is only like to grow going forward as banks continue to cut back on their lending.
But of course this only covers the very first stages of a business. What happens when you want to grow and develop your business? Growth businesses will often turn to venture capital funding but most venture capitalists will expect to see a robust business plan to know that they will get a return on their investment. Alternatively, if it’s an established business and growing, owners can borrow against their assets and banks will be more likely to step in at this stage and help, often through debt financing.
As the business continues to scale up, owners will need to access different forms of capital to survive and banks aren’t the only option – funds can come from within the business or investment from the owners. Giving away equity to third party investors is also an option but not always advisable as business owners will wish to retain as much of their own business as possible. Equity investment is also a much harder path to tread for smaller companies who do not have an exit plan in place.
A key message I always tell people looking to start their own business is never underestimate the power of your own commitment. Investors like to know that they too have taken a risk and have a strong enough belief in the venture to have invested their own time and money. So to summarise
• Ensure you understand the funding needs of your business by having a good business plan.
• Your own personal, family & friends will usually be the first port of call – ensure they understand the risk they are taking by investing in your business.
• See if there are any grants or special funding available in your area – ensure it is worth spending the time for the small grant/funding you may get. A good website is
https://www.gov.uk/business-finance-support-finder/search.
• A bank loan maybe possible if you can show to be a good credit risk or have some form of asset against which the loan could be secured
• If you are a business that has significant growth that will be able to exit in a few years then Business Angel funding in return for giving up some of your equity could be possible.
In a world dominated by competition and growing demand from customers, businesses must demonstrate an ability to adapt and evolve to changing needs. Listen to the customer – find out if the offering is still appropriate to today’s climate and work out how to develop going forwards.
Inspire confidence in investors, be those individuals or the bank, by having good open communication with them on a regular basis. Developing a strategy for dealing with the hard times shows a dedication and an ability to work through difficulties.
As a business continues to grow, so should the business plan. Regular reviews help to ensure it remains on track and having measurements in place is crucial in knowing goals are being reached and the business is achieving what it set out to.
