Financing your business
Starting your own business in 4 easy steps
Step 4 of 4 – Business and financial planning
By Simon Misiewicz of www.optimise-gb.com -30th October 2011
If you are starting a business but need some financial support to start or develop your business activities, then this article is for you. We will take you through the many options of raising finance and provide you with a list of the upsides and downsides to each option to that you can make the best decision for you and your business.
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At this time you should know what your costs are but if you would like to put your costs into a user friendly cash flow / profit & loss template then please click here.
What are my options?
The following options are available to you. I hope that the above list has provided you with some insights to the many options that you have in raising finance for your business.
Bank Overdraft:
A bank overdraft provides customers with a short term financial support but will be regularly reviewed by a bank manager and may need to be paid back within a short time scale.
Upsides
-Short term financial support to get started
-Getting money from the bank in this fashion is relatively fast
Downsides
-Can be expensive with high interest charges
-Banks may require personal guarantees
-Interest rates may be variable so can fluctuate over time
Bank Loans:
Bank loans are longer term financial support and can have a fixed rate of interest so you know what you need to pay back. This is particularly useful for one off events such as setting up a business, making a new product etc
Upsides
-Borrowing is for a longer period of times.
-The rate of interest can be fixed and you can forecast your repayments.
-Once paid back you still have full control & ownership over the business.
Downsides
-Can be expensive due to the levels of interest.
-Certain banks may wish to spend time with you to understand the business and request financial reports pulling you away from your customers.
-Banks may require personal guarantees.
-Repayments are not usually flexible and will require you to pay a fixed amount of the agreed term.
-Loans may be secured against assets of the company and you could lose assets if loans are not repaid.
Creation of shares:
If you have a limited company you could sell part of the company to people that may be interested in investing in the business and take a share of the profits.
Upsides
-If you wanted to have a limited company then you could sell shares to someone in exchange for money.
-People investing into your business may also provide some management support in developing the business.
Downsides
-Understanding the value of shares is subjective and disputes can arise.
-Decision making may become less flexible if the shareholder wishes to get involved in the business.
-There may be conflict of interest between you and the shareholder as to what to do with the business as certain intervals, especially if someone makes an offer for the business.
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Friends & Family:
Family and friends that you have a good relationship may also wish to support you and your activities and lend you money.
Upsides
-There may not be such rigid ties to the administration of the borrowing compared to bank and investors.
-The arrangement of money may be quicker than other borrowing options.
-Invariably the cost of borrowing will be cheaper than other arrangements.
Downsides
-Unless agreed at the start the amount of interest or the time to repay the debt may be disputed.
-Debts between friends and family can affect relationships especially in troubled times.
-The length and valuing of borrowing may not be stable as it depends on their circumstances not just yours.
Investors:
People may wish to invest in start-up companies in return for a share of the business. Click here to find out more.
We at Optimise-GB may also be interested in providing financial support so please contact us to discuss
Upsides
-Investors may provide some support to you in the running of the business.
-Investors may take more risk and invest more into the business compared to banks.
Downsides
-Investors may take some time to reach decisions about your business.
-The cost of investors may be considerable if not by way of interest returns but by way of their ownership in the business.
-Your decision making process may be slower if they need to be approved by the investors.
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If you have any additional questions or would like additional support then please contact us
I wish you the very best of luck
Simon
