What do you need the money for?
The kind of finance that you raise depends partly on what you will spend the money on. The start-up capital you need will be mainly spent in one of two ways:
- On capital costs - this is the cost of 'fixed assets' like workshop machinery, vehicles, computers and printers. It is possible to get asset finance from a bank for items like these.
- On running costs - these costs include items like stock, rent, telephone, salaries, petrol and stationery. It is often more difficult to get a loan for this sort of expenditure, as it is more difficult for the lender to recover the money if you default on your payments. With asset finance, the lender can at least take the vehicle or equipment back from you and sell it to recover their costs.
In your business plan, divide your start-up costs into capital costs and running costs, so that you can explore the funding options separately if you need to.
How much do you need?
The route you choose for raising money to start a business will also depend partly on how much money you will need to get your enterprise on its feet. If your planned business can be started without much outlay, then try to fund it from your own savings. This will speed up the process and you won't risk losing other people's money.
Whichever way you choose to finance your start-up, you need to work out how much you will need to spend and when you will need to spend it. The figure you are looking for is an overall "capital requirement" - the total amount that you need in reserve to fund each of the costs as they arise.
This means predicting how much cash will leave your business account each week after you start trading, and how much cash will come in each week. This is your cash flow
, and is probably the most important indicator of your business's health.
Loans or equity?
In addition to the money that you put into your own business, there are essentially two kinds of capital you can use:
- Loan capital is money borrowed from friends, family or a lending institution like a bank. The advantage of this route is that you can pay the money back over a period of time and keep control of the business yourself. A disadvantage is that your business must make a profit quite quickly so that it can start repaying the loan. Also, if your business fails, you are still responsible to pay back that loan, even if you don't have a business to help you make the repayments.
- Equity capital is money from a person or institution who takes a share of your company in return for the money they contribute to start or grow the business. The down-side for you, the owner, is that their equity gives them some control over how you run your business, and they will take a share of your profits. The up-side is that you don't have to pay the money back, even if your business does not succeed and the capital is not recovered - this reduces the risk on your part.
In reality, most businesses will use a combination of loan and equity capital. Indeed, banks and other lenders will really only consider giving loans when they can see that you (or your partners) have put your own money first - as an indication of your commitment and confidence in the enterprise.
Going it alone
Starting a business by yourself - as a sole usually means that you will rely on your own money - savings, for example. This may not be enough, however, and you might have to consider looking elsewhere too.
The headings below will guide you in ways of starting with very little, and with some help from your friends.