Every enterprise needs a source of finance, especially when starting up, so business funding is a major consideration for every company owner. Most businesses will need funds for premises, equipment and marketing expenses before even a single sale has been made, and this money has to come from somewhere. Once trading is under way, it can still be a challenge to keep cash flow going in order to pay bills, rent and wages, especially for smaller businesses.
The ideal source of business funding for most owners is government support or government grants, especially as these can often be accompanied by free business advice or consultancy. However, competition for these grants is immense, and the criteria are very strict. One type of government grant available in the UK is the Research and Development grant, which is designed to assist in the introduction of technological innovation to the enterprise. It is particularly aimed at SMEs (small and medium-sized enterprises) and individuals.
Apart from grants, business funding sources fall into two main categories – debt financing and equity financing. Debt financing means that you take out a loan, which of course has to be repaid before you can go into profit. Nowadays it is quite difficult for a start-up to borrow from a bank, since it is usually not possible to provide a track record of business success. Any commercial lender would require either a guarantor, or collateral, such as your house, as security.
A lot of small or new businesses think first of borrowing from family or friends. While some experts advocate this as an excellent way to get started, others counsel against it. Many individuals who provide financial assistance to relatives or friends do so on trust, with very little understanding of the risks involved. Consequently, if the money is lost, this can seriously strain relationships. If you are borrowing on this basis, it is essential to put it on a formal footing, and ensure the lenders are very clear where their money is going.
The alternative to debt financing is equity financing, whereby you are provided with business funding in return for handing over a percentage of the equity, or shares, in your business. A popular type of equity financing comes from people known as business angels, successful business people who are willing to put funds into enterprises which they see as having potential. To stand any chance of obtaining investment from angels, it is essential to provide a very precisely drawn-up business plan, thoroughly costed. The proposal needs to demonstrate that there is a need and a market for the product or service, and that the product or service has a clear potential to meet the need.
You should not expect looking for finance to be easy, or without risk, especially in the current financial climate. Many lenders and investors have been let down in the recent past, and are now much more cautious than they would have been a few years ago. Nevertheless, always remember that this is how they make their living, and they will always be on the lookout for a potential source of profit. If you have confidence in your offering, and provide a detailed and professional proposal, you stand every chance of finding the business funding that will set your enterprise on the right path.
