A short guide to financing a new business

Small business entrepreneurs often find it difficult to raise the capital to finance their new business. According to the President of the London Society of Chartered Accountants, Susan Field, one in every three businesses close within the first three years of setting up because of the paucity of funds. But, new businesses can ensure safety if they are able to secure enough finance to see them through these crucial years.

Here are some tips to help you finance your new business.

When you buy the new business

Personal finance: Dip into your savings, get a mortgage on the house, sell your personal assets or apply for a secured bank loan. This is the safest way to raise finance as it ensures total freedom and flexibility for the business owner. This way, you are not dependent on the mercy of your investors.

Loans from friends or family: If you can get a loan from your family or friends, you can enjoy better terms than those provided by a bank or professional lending agency. However, asking for loans from friends and family may test existing relationships.

Bank loans: An overdraft or bank loan is one of the most common ways of raising finance for a new business. But bank loans do not offer any flexibility as you have to pay interest on the funds you withdraw whether you are utilizing the funds or not. In case of an overdraft, you need to pay interest only on the part you have withdrawn.

Small Firm Loan Guarantee Scheme: In case of businesses that have an annual turnover of less than £3 million, the government acts as a guarantor of the loan (for up to 75% of the loan amount). Two years after availing the loan, the bank loan guarantee may be extended up to £250,000, if required. In return, the government charges the business a 2% premium on the amount outstanding.

Investors from outside: You can raise money from investors by issuing shares. The advantage is that you need pay your investors only when the business can afford to make payments. The inherent risk is that investors may try to control the running of the new business.

When the new business is growing
Once you are in business, you will still need finances to meet your business commitments. Partnerships or limited companies selling goods or services can make use of invoice discounting is a viable option. Factoring is a similar practice where the Factor will collect money directly from a bill outstanding with the customer. In these two ways, you can easily obtain an advance on 80-90% of the invoice value.

Asset finance is another option for financing a new business that is just beginning to expand. However, only assets that have a determinable value can bring in money. It is possible to obtain equity finance for an expanding business through Business Angels and Venture Capitalists.

Proper financing is the lifeblood of a new business. Business owners must plan their financing well in advance to ensure the regular inflow of funds.




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