Two of the biggest challenges when starting a new business is getting the right amount of start-up capital and managing the cash flow requirements of the business in the future.
Lack of financing, financing at the wrong rate or lack of cash flow are three of the main reasons many new businesses fail. Something as simple as poor cash flow (where, for example, you are giving credit to your customers and paying your suppliers quickly) can lead to even an established company failing so it is very easy for it to affect a new company.
When considering any funding options you should think about the following :-
- Are your needs short or long term (a matter of months or years)
- What is the money needed for? Operating expenses (buying stock, paying staff, rental of a shop or office) or capital expenditure (buying equipment)?
- Will you need all the money in one lump sum (to buy equipment for example) or will you need it in smaller sums over a period of time (to allow you to buy new stock before your customers pay their invoices)?
- Are you willing to take on all the risk of your business failing or do you want to share the risk?
- Have you looked at who can help you (for example do you have friends and family that may be able to lend you the money or will you have to go to the bank or other source of lending for a loan)?
These questions may help you decide which funding options are suitable for your new business.
There are three main types of commercial financing which are debt financing, invoice factoring and equity financing.
With debt financing, you borrow and agree to pay the money back along with an interest rate fee. You must pay this debt back whether or not your venture succeeds. A bank loan is one of the most common forms of this type of finance and your bank may well want a guarantee from you in the form or a personal indemnity or a charge on your house or other property if there is any doubt in their mind that you will be able to pay the loan back.
Invoice factoring is a different form of finance that is available once your business is up and running. Typically, when an invoicing factoring scheme is set up you can borrow around 80% of the value of your approved invoices that are less than 3 - 4 months old (there is no point in factoring possible bad debts as these will not help your finances). Thereafter, cash will be made available against invoices on a daily basis. The remaining 20% of the invoice value, less the charges from the factoring company, is paid to you by the invoice factoring company once the value of the invoice has been collected by them.
Equity financing involves selling part ownership of your company. With equity financing, you do not need to repay the money. However if your company succeeds the investors now have partial ownership of your company. Although if your company fails the investors will have lost their investment.
To get more advice on forming your company and financing your new business and to find out which is the best method for you to use we would suggest that you talk to an accountant. To find a local accountant enter your postcode in the box at the top of this screen. Our directory lists accountants throughout the UK so there is sure to be one near you.