Finance for Start Ups

Starting your own business from scratch is extremely daunting, not least because of the challenges facing you in acquiring sufficient funding for your chosen venture.

We could write endlessly about the options, opportunities and pitfalls of starting a business. But an incisive statistic is that around half of all start-ups fail within five years, many of them running out of cash.

Another major issue to consider is that businesses generally require five skill sets to prosper in the long term. These we would identify as:-

  1. Sale & Marketing Skills – the ability to market and sell your product or service;
  2. Technical Skills – having the expert technical knowledge of the product/service;
  3. Operation Skills – to organise the systems and procedures that your business will need;
  4. Leadership skills – critical to build and motivate a team around you as the business grows;
  5. Financial Skills – ability to understand basic accounting and forecasting, and impacts on cash flow from growth and investment decisions.

The management of most businesses exhibit (1) and (2) in their early days, and it is only as the business progresses do shortcomings under (3), (4) and (5) start to manifest themselves.

Raising the cash to start up and grow the business in its early days is another one of the challenges of course, especially as many businesses do not turn a profit for the first year or so. This challenge often combines with (an understandable) lack of financial skills in management, resulting in businesses facing early and ongoing cash flow difficulties.

It is crucial therefore to consider and implement the following:-

  • Write a business plan and cash flow forecast. Free templates are available from many sites on the internet.
  • Seek a mentor to overview, critique and challenge the plan and forecasts. There are many sources of help and advice. Please see:-
  • Maximise pessimism and minimise optimism. Most entrepreneurs are inherent optimists. You have to be to have the drive, positive attitude and enthusiasm to start a business! But recognise this and apply a big dose of pessimism when undertaking your financial forecasts. In so doing hopefully you will recognise the possible additional need for cash early on, and so avoid a cash flow crisis. Adopt a worst case scenario and then some!
  • Make sure you allow sufficient funds for your own personal needs for an extended period. Create a cash buffer to allow for your requirements to allow for the period to get the business to break even – and then another year beyond as well!
  • Consider what will happen to cash reserves should trading actually go better than expected – sometimes very strong trading (known as “overtrading”) can lead a business to run out of cash even though it is profitable.

So you now know how much cash the business is going to or might need. Where does the money come from?

Some options.

  1. Your own cash. But don’t use every penny – try to keep some in reserve as part of your cash buffer. Traditionally many lenders have wanted you to make a contribution to the cash needs of the business roughly equivalent to what you ask them to lend. This is not always the case nowadays, although most people who lend to you will expect you to have some “hurt money” in the business which you stand to lose should the venture fail.
  2. If you have equity in your home, can you raise money on your mortgage? The mortgage lender will require you and/or your partner to have a stable income stream to fund the mortgage repayments. Staring a new business can of course be incompatible with this but it may be that you are starting the business part time and/or your partner still has a stable income. The advantage of this approach is that mortgage borrowing is usually at low rates and repayments are comparatively low – minimising the strain on your business in its early days. You are of course putting your house at risk. But if you are going to borrow money, most lenders will otherwise want personal guarantees. If you cannot cover a personal guarantee, you may have to realise equity from the house one way or another to repay a lender in any case.
  3. Grants. There are a range of government and local authority grants available. There are many aims and objectives of such grants, which are to help start-ups, create jobs and drive the economy. Please see the link below.
  4. Private/not for profit philanthropic bodies – eg. The Princes Trust – who exist to help young people with funding and support. See:-
  5. Business Angels (not dissimilar to the well-known “Dragons Den” figures). “Angel” investors usually expect the company to have a 5 to 10 year exit strategy. Entrepreneurs can develop a partnership with these business angels based on each other’s needs – some angels take a more managerial role, while others can sit back coolly and ride the investment to term. In return for their investment they will expect a sizable slice of the business – quite often in the range 30% to 50% of the shares. See UK Business Angels Association at:-
  6. Loans from relatives. The advantage is a low/no interest loan, possibly in perpetuity and few questions asked. Relatives will often (naively) accept the optimism and enthusiasm of the entrepreneur as adequate assurance that they will be repaid. We see this regularly, but be warned – the chances of your business failing are high, so do you want to jeopardise your family relationships on your business venture? Some would say don’t mix family with business, although many people do of course. A great way to raise money but try to make sure that the family member does not need the money back anytime soon.
  7. Funding from the High Street Banks. The Banks still do fund start-ups. The advantage is relatively low rates (c.4% to 7% per annum). But they will probably want to be fully secured, will expect you to have a high degree of experience in the proposed venture, and will want you to put a similar amount in to what they lend you. They may be able to utilise the Enterprise Finance Guarantee Scheme as security for the loan. See
  8. Funding from small lenders and Peer to Peer lenders. Some of the 100 such lenders in the market place will assist in funding start-ups. Keep in mind that they all seeking to generate returns on their investors’ money and will lend based as much as anything on your personal ability to repay the lender should the new business fail. These lenders adopt varying specialisms and niches, and are generally far easier to deal with than the high street lenders. Their pricing will be high or very high!
  9. State assisted funders. These organisations are spread throughout the country, and will lend varying amounts to start ups dependent on local policy. For example, there are some good start up loans available at 6% per annum (no fees) from the start up loans company, – currently a maximum of £10,000 per individual involved in the business. The Northern Powerhouse Investment Fund will lend up to £100,000 to “high value” start-ups in the North. One major advantage of such lenders is their much more holistic, almost philanthropic approach, and the availability of business mentors to support you going forward. Please see link to government website:- “Finance and Support for your Business”

We would always recommend that start up businesses engage with a Broker such as Key Commercial Finance to maximise their chances of securing finance and indeed to make sure it’s the most appropriate finance for their business.