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Getting funding

Before you begin trading you require sufficient finance, both to set the business up and cover initial running costs.

What type of finance is available?

Businesses are funded through four main types of finance:

  • Private equity, which is money that is invested in the business in return for a share of the business.
  • Debt, which is an overdraft, loan or credit card finance.
  • Grants and awards, which are normally given for a specific project or to reward a particular achievement, and do not usually have to be paid back.
  • Retained earnings, or funding that is carried over from the previous year's profits.

Start up businesses don't have access to retained earnings, so normally rely on equity or debt funding. However, some businesses may be eligible for grant aid and business advisers should be able to provide details of any locally available funding.

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What are the main sources of equity funding?

Equity funding, or money invested in the business, is available from a number of sources, including:

  • Personal savings or the money you have available to invest in the business raised from family and friends. Most investors will expect to see you investing in your business before they are willing to support you. This is the most common source of funding for businesses just starting up.
  • Business angels are personal investors who invest relatively small amounts of money (usually between 10,000 - 100,000), in helping a business reach a level of turnover where other investors aren't willing to support the enterprise.
  • Venture capitalists provide businesses with access to large amounts of money, often in excess of 1 million. In return they expect a share in the business, rapid growth and a detailed exit strategy.

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Where can I find out about equity funding?

Contact your business bank manager who will be able to offer advice on making the most of your capital. He or she will also be able to offer advice on business angels and venture capitalists that may be willing to support your business.

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What type of debt finance is available to a business start up?

Debt finance can range from short-term solutions such as an overdraft, to long or medium-term loans. You should consider the length of the loan period, the interest rate charged and the need for security, before committing yourself to any form of debt finance. Soft loans are an attractive alternative to the traditional bank loan and are usually provided by business support organisations and other agencies working to encourage small business development.

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Where can I find out more about debt finance?

Banks are usually the first stop for anyone considering debt finance. They provide a range of financial solutions from overdrafts to loans and mortgages, all of which can be useful sources of working capital. For information on non-bank loans, contact your business adviser who will provide information on soft loan schemes in your area.

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Where can I find out more about grants and awards?

Grants are usually available for a specific purpose, such as training or marketing costs. Awards are often made to reward a specific achievement. Grants and awards do not normally need to be paid back and are only available to businesses that meet certain criteria. Your business adviser and local business support organisations are the ideal starting point for information on grants and awards in your area.

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What financial information do I need to prepare?

Preparation is vital before approaching anyone for grant aid or financial assistance. Before anyone provides funding, they will expect to see evidence that you have thoroughly researched your business idea and that it has the potential to lead to a viable business. The best way of demonstrating that you have done this is to produce a business plan. The information included should include a cash flow forecast, balance sheet forecast, profit and loss forecast, business plan and personal budget. Your business adviser or local business banker will be able to provide more details on preparing and presenting this information.

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What is a cash flow forecast?

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What is a balance sheet forecast?

A balance sheet forecast shows fixed assets, such as equipment, and current assets, such as stock and debtors - people who owe your business money. The balance sheet forecast should also show how your assets are financed - equity, loans and current liabilities such as creditors. This will show your business' net worth and whether or not the business is solvent.

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What is a profit and loss forecast?

This gives an indication of your predicted income, usually as a result of sales, and the likely expenditure on a month-by-month basis. This is different from cash flow as it takes into account any outstanding invoices for money owed to you and any invoices that you need to pay. It also shows non-cash expenditure such as depreciation. The difference between income and expenditure is profit - something anyone considering investing in your business will be keen to see!

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Why do I need a business plan?

This will provide evidence that your business has the potential to be a success. A good business plan will contain:

  • An overview of the business and what it will do.
  • Details about the business, such as its legal status, aims and objectives and key personnel.
  • Details of the products or services your business will supply.
  • Details of your target customers and estimated numbers.
  • Assessment of your competitors and their strengths and weaknesses.
  • How your business is different from the competition.
  • Details of how you intend to market your business.
  • How and where the business will operate.
  • Financial requirements - including how much money is needed, and, crucially, when it will be needed.

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What is a personal budget?

You must work out all your personal expenditure, such as your mortgage repayments or rent, gas, electricity, telephone bills, water rates and council tax bills. Anyone offering additional finance to your business will want to see that you have considered how much you must earn from the business in order to meet your living expenses. As the business develops, you will probably be able to take more out of it. However, initially it is a good idea to reinvest the profits, further funding your own business development.

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Hints and tips

  • Be realistic when preparing financial forecasts, as potential investors will want to see evidence backing up your claims.
  • Without a good cash flow and credit control system your business could fail.
  • Be thorough when estimating financial requirements - forgetting or leaving out a budgetary area to make your forecasts look better could lead to serious cash flow problems.
  • Be sure that you can afford to meet repayments before taking on any loans or debt finance arrangements.
  • It often takes longer than predicted to get a business running on a sound financial basis, so make sure that you have sufficient revenue to keep you going while the business is growing.
  • Take professional financial advice before setting up your financial management systems.

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