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How to Finance Your Business

Getting the right finance, at the right time, is hugely important for all businesses. As well as needing money to start up, you’ll need a steady flow of cash to pay your overheads, invest in equipment and supplies, and keep your business afloat while you’re waiting for your customers to pay you.

You might also need extra cash to expand into new ventures – or to cover yourself during times when sales are low.

Here’s our guide to the different ways you can finance your business.

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Creating your budget

The first step to financing is to put together a budget for your business. The most important thing is to look at your costs – both fixed costs such as staff wages and premises costs, and variable costs such as the supplies that you need to fulfil each order.

Then, look at your projected income from sales. Try to be realistic – overestimating how much you’re likely to make could be disastrous. You can compare costs and income with a simple spreadsheet.

When you’ve done this, you should have a good idea of how much finance you’ll need, and when.

Sources of finance

Once you have your budget, you can look into where the finance will come from. Different sources of finance have their own advantages and disadvantages – so think about it carefully before you start.

  • Your own savings – most businesses will need some savings to start up. Other sources such as banks will be unlikely to want to lend you funds unless you can provide some savings of your own.
  • Family and friends – they might be able to help you with early-stage funds. Make sure you have a clear agreement with them (for example, will they have a say in how the business is run?), so everyone knows what to expect.
  • Bank loans – for this, you’ll need a clear budget as above, and a business plan which sets out how your business is going to be run and why you expect it will be successful. Bank loans can be difficult to secure in hard economic times, so make sure you’ve done your homework and can answer any difficult questions.
  • Asset finance – you can spread the cost of buying vehicles and equipment using hire purchase or leasing. If you sell on credit, you may be able to borrow against unpaid invoices using factoring or invoice discounting.
  • Bank overdrafts and credit cards – although these can be expensive, they could help you with very short-term cashflow worries. Make sure you can repay quickly to avoid interest charges, and agree your overdraft facility with your bank first.
  • Business angels – these outside investors use their own money to invest in risky but potentially high-growth businesses which find it difficult to get financing elsewhere. Again, you’ll need an excellent business plan and budget, and be able to pitch to the investors confidently.
  • Crowdfunding – you may be able to attract lots of small investments through an online crowdfunding service. Or you may be able to borrow through a peer-to-peer lending service.
  • Development loans and grants – depending on your type of business, you might be able to get grant funding from the government, local authorities or the European Union. Support is usually given for innovative research and development, or to businesses setting up in regeneration areas. You might also qualify for a government-guaranteed loan under the Enterprise Finance Guarantee scheme.

Most businesses will choose to use more than one source of finance. Careful and realistic planning from the start is essential.

 

This article is provided only for general informational and educational purposes. It is not offered as and does not constitute legal or other professional advice on the subject matter in question. You should not act or rely on information contained in this website without first seeking professional advice on the subject matter in question.

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