How to finance a start-up

funding startup

Starting a new business is a time when a multitude of complex problems may threaten to overwhelm you and the issue of finance is one of the most difficult to get right.

The first thing to get in place is a sound business plan with detailed financials. Of course, you really should have this anyway but when you are raising start-up finance it is even more important as your potential funders will want to see that you have put some thought into producing a credible financial forecast and that you understand it fully.

The truth is that if you can’t be bothered to produce financials then funders may take the view that they can’t be bothered to invest.

Once you have your forecasts you’ll know how much you need and indeed what the money will be used for. This is important because matching the right finance to the expense is key.

For example, when you are financing long term assets such as buildings you will want to look for long term financing like a business mortgage. Because it’s long term and secured on an asset it will tend to be more difficult to set up, less flexible but much cheaper.

On the other hand, when financing working capital that may ebb and flow on a monthly, weekly or even daily basis then you’ll need a more flexible method like an overdraft. These are easy to set up and very flexible but of course you pay for this through a higher interest rate.

Not all financing for a start-up is loan capital though. Equity is a major source of financing for start-ups.

Equity (or share capital) is the value of the business and many owners buy 100% of this themselves using their savings – in other words putting money into their own business. Others find investors willing to essentially take a gamble on the company and put in cash in return for owning a part of the enterprise.

There are significant benefits to this. Often an investor will be an experienced ‘business angel’ who is able to provide help and advice as well as cash. Equity capital usually only takes money out of the business when it begins to make a profit unlike loans that need to be paid off whether the business is doing well or not.

The downside to selling off equity is that naturally some of the business is then owned by someone else and directors will have to respect the wishes of their fellow share owners. There are also legal requirements for directors of companies owned by more than one person.

There are also a variety of more complex funding options that will be applicable for companies with special attributes and that require specialist help to put in place.

In all cases one of the most important things is to find a funding partner that can give help and advice on all types of funding for start-ups and has a variety of different sources for capital.