How can you finance a new business?

Financing a new venture is a challenge, even harder in the current climate of high inflation and global uncertainty.

Difficult, but not impossible. With planning, careful research and the right advice, you should be able to find the finance that is right for you.

However, with all forms of finance some pitfalls are best avoided:

Lack of preparation

In some ways persuading a financial institution or financier to lend you money for a business is a bit like getting a mortgage.

They will want to see that you can afford the loan or support being offered and have a clear plan for repayments and the initial equity to kick start the company.

They may take the view that if you are not prepared to invest in yourself, then why should they?

For most loans you will need to provide some collateral, should there be a default in payment, but lenders will also want to see a clear business plan and some indication of income to support regular repayments and interest.

Planning is the key

You know what they say, failure to prepare is preparing for failure.

As mentioned, you must have a business plan. Unfortunately, many start-ups apply for finance with an underprepared or even non-existent business plan.

To persuade a lender to part with the funds, a clear and costed business plan is essential for them to see your goals and specifically, how you intend to reach them.

Choosing equity or loans

Equity investments can come from friends and family, angel investors online or even crowdfunding platforms.

Equity is less risky than a loan because there is typically less or nothing to pay back. Instead, investors enjoy a cut of your profits by being given shares in your company.

This can free up additional funds needed early on within a business but can create conflict, especially where investors are friends and family.

On the other hand, a bank or lender doesn’t have any ownership of your business and has no say in the way you run your company.

A loan can be short-term or long-term. Whatever the loan’s terms, however, you must pay the money back within a set period, plus any interest.

If you are not sure which option is best for you, speak to a professional adviser beforehand.

Know your borrowing limits

It seems obvious, but you should not borrow too much (or too little).

You should have a clear conversation with potential lenders about how much you need and how much they think you can afford.

You shouldn’t make the mistake of asking for more than you need, but it is a good idea to build a contingency into the amount of working capital you budget for, just in case something unexpected arises.

If you are looking to start up or scale up a business, we can help you access the funding you need, please speak to our team.