Funding is absolutely critical for any budding entrepreneur and new business. Unless you’re already a millionaire, your new business venture is going to need at least some funding, be it from external investors or from people you already know such as family or friends.
This post will give a brief overview of some of the forms of funding available for all you up-and-coming entrepreneurs.
A good, detailed business plan is the key to securing quality funding from good sources. If potential investors can see that you have a good business plan, they will be much more willing to lend you money. Give detailed information of what direction the business is looking to go in and what the potential returns are for prospective investors.
One of the most common methods of gaining start-up capital for your small business is to gain a bank loan.
To get a loan from your bank you will have to show them a detailed business plan with realistic cash flow forecasts for your business. The bank will be reluctant to grant you a loan for your new business, if you do not prove to them that you are able to repay it along with interest.
Be sure to weigh the risks up against the potential gains. Banks may ask for security on your loan to ensure that you pay the money back. Securities could be your car or even your house. A bank loan can be a fairly risky avenue to go down when looking for business funding, but it is an avenue which is worth exploring.
A big advantage of a bank loan is that, unlike with other forms of funding, you will not have to give the bank a share of your company or any amount of your profits. You alone keep sole ownership of your business.
A grant is a specific amount of money given to a business for a specific project or purpose. A huge advantage of grants is that you do not have to pay them back.
Grants can be given by various organisations; some of these include the European Commission, the government, regional development agencies and some selected charities.
As previously mentioned, grants are only given to businesses to pursue a specific project or purpose. The money will only be given if the organisation can see that your business plan complies with the conditions of the grant.
The Small Firms Merit Award for Research and Technology (SMART), for instance, is given to businesses to participate in research & development in the areas of science, engineering and technology.
Grants can be tough to obtain, but the potential gains from a grant are worth the effort!
A common way of securing funding for your new business venture is to apply for an overdraft.
Overdrafts are usually seen as short term measures to help you cover immediate financing needs; it should not be a method for long term finance.
The good thing about overdrafts is that you only borrow what you need at the time to cover your current finance need, which makes it cheaper than a bank loan.
Be sure not to go over the agreed overdraft limit however, the bank will charge you a fee if you do so.
Asking parents or friends
A common method amongst budding entrepreneurs is to ask family and/or friends for a loan. People who care about you will be more willing to help you out. This is why it is such a common method of sourcing funding.
Be careful! Many families/friendships have been destroyed by people not being able to repay loans. Be sure that you have the means to pay them back before you agree on the amount. A good idea is to have a written contingency plan between the two parties if there are difficulties in paying the money back.
The lender should also be informed about boundaries in the agreement. It can be easy for a lender to want to become too involved in the business that they have helped to fund. Come to an understanding on how much influence the lent money will give your friend or relative over the company.
This article has given only a brief overview of some of the forms of funding available to new businesses. For further information on the options available to you when looking for funding to set up a new business, take a look at Thomson’s business funding guide.
About the Author: Estelle Page has a wealth of experience in the business field; she is a self-employed interior designer who built her business from scratch.
Photo credit: Tony Cecala