Financing a Small Business

Starting your own business is a test of character. You need to spin multiple plates and functions, coupled with maintaining resilience to manage financial pressures. Financing a small business involves careful planning and organisation. For instance, a 12-month cash flow forecast to identify your expected monthly sales and costs. It’s more than that though, because it’s also about keeping an active eye on the numbers. If you want to know how to finance a startup more effectively, this startup business advice blog is for you.

It’s all very well, having a great business idea, but you’re going to need some cash to get started. Certainly, enough cash to cover business costs and a personal living budget. Most importantly, if you’re planning on giving up your day job before you start trading. Not only that though, but until you have a steady sales pipeline. It doesn’t stop there either, since cash flow can be a challenge throughout your startup’s journey. Financing a small business has so many variables. The amount of money you need also depends on the type of business. Let’s explore this a bit more to see how to finance a startup more effectively.

How to Finance a Startup

Most importantly, you need to calculate what you need to bring your idea to life. It’s important to complete thorough research before you start a business. If you want to know how to finance a startup, you need to be thinking about all the costs you could incur. These will depend on several factors, including the type of business structure. Check out this checklist for starting a business and factor in all your pre-start up costs. For example, costs for website domain names, hosting, web development and social media accounts. Note, a standard website (selling services) will be much cheaper than an ecommerce website (selling products).

You also need to consider whether you’re working from home, renting a space, shop etc. What about marketing and the tools you need to run your business? Certainly, you’re probably going to spend more than you think. It’s important to spend time researching what you need and obtaining 2-3 quotes for the bigger ticket items. This will help you make an informed decision about suppliers and partners. Spending more than your forecast and what you think is one thing, but your sales targets may not meet your expectations either.

Startups that provide a service, tend to have much lower costs than those providing products. For example, in these cases you’re more likely and more able to work from home. This avoids the need to pay for additional and expensive rent. Don’t forget the impact of business rates too. If you sell products, you also need to think about manufacturing, storage and distribution costs.

Options for Financing a Small Business

There are several options for financing a small business, but this doesn’t mean they’re all suitable or available for your startup. Investigate the options carefully and make a plan before you start your business. Most importantly, think ahead and prepare for the best- and worst-case scenarios to facilitate success throughout your startup journey.

Funding

  • Bootstrapping is when you fund a new business through personal finance or operating revenue.
  • Crowdfunding is where you seek large scale funding for your business or a project online.
  • Venture capital provides funding in return for a share of your business.

Grants

 Loans

  • Business loans and overdrafts from a high street bank or building society, although these are dependent on having a good business credit rating, which takes time and mean you need to be trading, with a steady cash flow.
  • Peer lending between individuals, which is organised by a broker.
  • Personal loans from a family member or friend, although there’s a great deal of risk and reliance on good faith between both parties. This option tends to be limited to smaller amounts. It also depends on honesty, trust and your ability to pay a personal loan back.
  • Startup loans from The Startup Loans Company is a government-backed scheme. If successful, loans can be spread over 5 years or less and can be paid back early without penalties. This option is based on your personal credit rating. In addition, you need to create a 12-month cash flow forecast for your business. Plus, for your personal living expenditure and a robust business plan.

Checklist for Financing a Small Business

  • Seek financial advice from a qualified and authorised Financial Advisor.
  • Research how to finance a startup carefully. Your options will vary according to credit rating, amount of funding required, type of business, location and much more.
  • Create a 12-month cash flow forecast and business plan, including SMART financial goals. This means preparing for committed costs in advance (at least 12 months), so you feel safe and secure.
  • Keep fixed expenses as low as possible, particularly in the early stages of your startup.
  • Monitor your cash flow on a regular basis. Ideally, reconcile your monthly profit and loss to compare your forecast with actual costs and revenue.
  • Open a business account to keep things separate. Most importantly, this helps you build up your business credit rating. You may need this in the future, should you consider a business loan for growth or a project.
  • Obtain business insurance to protect you and your business. For example, against possible injury, damage, loss and/or legal costs.
  • Keep on top of debtors and creditors. Ensure you keep to your forecast budget/cash flow as much as possible.
  • Negotiate supplier contracts and try to get the best price. Remember, cancellation and other contractual terms to minimise costs. In addition, watch out for annual price increases. For example, RPI increases that can be built into contracts.
  • Market your business carefully and weigh up all the pros and cons. Be wary of signing up to 6-12-month minimum contract terms. In particular, if there’s no option to cancel if something doesn’t meet your expectations or agreed deliverables. Start small, do what you can yourself. Make use of available technology and tools to make you and your business efficient.

Further Reading & Support

Visit the Government’s Business is Great website for helpful information for financing a small business. This includes entrepreneurs who are just starting out and those looking to grow their business. Most importantly, before embarking on financing a small business, obtain professional financial advice. WHICH has put together a great article on how to find a financial advisor, which includes a tool to check if a Financial Advisor is registered and authorised. When it comes to how to finance your startup, please make an informed decision.

Regardless of the type of funding you choose, it will still have a degree of risk. In some cases, your personal assets are liable. Therefore, weigh up your options and work out what you can afford. It’s important to keep a timely eye on your cash flow, so check for abnormalities, manage debtors and pay suppliers.

Maximum Solutions Consulting Ltd can help you with writing a business plan, putting together a cash flow forecast and setting up your business so it operates efficiently fit. Visit the Business Advisory Services London and Business Coaching London pages to find out more.