Setting up a new business can be a daunting prospect. There’s the possibility of failure, and with it, the risk of losing the money you’ve invested in your company, as well as seeing all your months or even years of hard work go to waste. But, there’s truth in the old saying, “nothing ventured, nothing gained.” The biggest rewards accrue to those who not only have a vision for their business, but also are prepared to see it through and have the courage of their convictions.
Nonetheless, it can be hard finding sources of funding for a new business. In many cases, finding a business angel may be your best bet for sourcing capital to start up a new company. But, let’s have a look at some of the other options available to you.
First and most obvious, you may have the available funds yourself. Depending on the level of risk, you may not feel comfortable dipping into your savings to fund a new business; this is a decision you will have to consider long and hard. However, if you feel able to use some of your savings to finance a startup, then so much the better.
Another option is to borrow money from family or friends. If you’re doing this, the best and fairest way to get them on board is as investors, making sure that they have the chance to share in your success – but also warning them of the potential pitfalls. Make sure they are clear on the nature of the risk they are undertaking – many friendships have been broken down the years due to money. It’s often a good idea to put your agreement in writing, just so there is absolutely no misunderstanding further down the line about the terms on which you borrowed the money. It’s up to you to be honest about your chances of success and to give them all the information they need.
The second major type of financing is acquired by taking out a standard loan. This may be from your bank or another lender, and can include bank loans, overdraft facilities, or credit cards. Taking out one or several loans is not a bad idea, but you must make sure you’re not taking on more debt than you can afford to repay.
Take a careful look at repayment terms and interest rates, and make sure you’re getting the best possible deal before signing anything. Even if your fledgling business is doing well, excessive loan repayments can be a heavy drag on your profits, so do the sums beforehand, and make sure you can afford to repay the debt even in a worst-case scenario. You might also want to think about remortgaging your house, or other investment properties you may own. The same rules apply; make sure you don’t take on more debt than you can afford to repay. Taking out a large loan or remortgage can force you to make an honest appraisal of your business plan; sometimes it can be just the reality check you need.
If you don’t have any equity with which to take out a loan, then there is another option, called the Small Business Loan Guarantee scheme; it’s a business loan 75% guaranteed by the Government. You are required to contribute just 25% of the security, so this is an excellent option for anyone who doesn’t have a huge amount of capital with which to set up their small business. However, it’s worth noting that these loans do have an administration fee attached, and the rate of interest is normally relatively high – some 1.5 to 2.0% higher than base rate.