Starting a business costs money. Start-up costs vary widely depending on the nature of the business. Starting a shop on ebay, for instance, is bound to cost significantly less than opening a tea-room. The majority of business ventures do, however, require a substantial amount of investment to get on their feet.
There are usually numerous things to pay for before a business can even begin to make a profit. Supplies, rent, utility bills, stationary, branding, promotion, legal admin and hiring professionals are all expenses that can rack up surprisingly quickly.
Although some people spend their whole working lives saving up to start a business, most people don't have thousands of pounds worth of expendable cash lying around. The fleeting nature of business often means market opportunities arise in a flash and disappear quickly. Entrepreneurs need to be on the ball, and sharp.
This is why it is common practice for start-ups to seek financial support from external sources.
How much does is cost to start a business?
Every business is different. You are always advised to write up a business plan in order to work out costs before starting a business. Using your business plan, you will be able to reach an estimated figure. Costs could include:
- Sales supplies - What materials do you need to sell your product or service? This figure should include manufacturing equipment, shipping costs, packaging, shipping insurance, warehousing and raw materials.
- Professional fees - This figure should include all legal or professional service fees, such as Companies House fees, permits, licenses, solicitor and accountant fees.
- Technology - How much is it going to cost to buy necessary IT equipment- software, printers, mobile phones, website building and developing, Internet, servers and security?
- Administration fees - These will include costs of business stationary, parking, utilities, rent, desk, chairs and other office supplies.
- Sales and marketing - Cost of promotion and advertising, including show attendance, marketing materials, printing costs and travel costs for meetings/networking.
- Salary - Contributions made under the Pay As You Earn (PAYE) system for staff, including National Insurance (NI) and Income Tax contributions.
Where can I get start-up funding?
Start-up funding could come from:
- your own savings
- family and friends
- bank loan
- selling shares
- government grant
- non-bank finance.
When collecting capital from external sources to start a business, you will need to consider what kind of help you need. Are you asking to borrow money for initial start-up funding, or do you require long-term investment?
If your business has steep start-up costs, then you may require immediate, short-term funds to get things up and running. In this situation, taking a loan could be ideal. Taking a loan is very simply borrowing money for a specific time before you pay it back. The two main types of loan are:
- interest-free loan
- interest loan.
Taking an interest-free loan (usually from friends or family) would mean you only have to pay back the amount you borrowed. Loans from professional loan companies and banks tend not to be interest-free. If you take out a loan of this kind, you will need to work out how much interest you can reasonably afford to pay back. Remember that there will be tax implications for both you and the lender on any interest paid.
If you require long-term or permanent funding to keep your business running after the initial start-up funding, you may want to consider finding investors to buy shares in your business. You can either look for:
- business partners
When recruiting a business partner, you will need to stipulate how much control he or she will be entitled to. Generally, withholding a minimum of 70% of your business will ensure you maintain most of the control.
If you are keen to stay in full control of your business, then you may wish to find shareholders. Shareholders invest an initial sum and expect eventual dividends if the business does do well in the future.
Advantages and disadvantages of the different types of start-up funding
Some people are lucky enough to be able to provide their own start-up funding from savings, putting them in an excellent position to start a business. Savings could come from earnings, inheritance, gifts, or from the sale of valuable items.
Advantage: Providing your own capital means you get to launch your start-up without being indebted to anyone else, and without having to give away a percentage of your business. It also means you get to avoid the potentially effortful and time-consuming process that accompanies applying for government funding.
Disadvantage: Spending all of your savings at once is a massive risk. Some people remortgage their houses, or sell their cars and valuable possessions just so that they can afford to start a business. Using your own money is entirely your gamble and you alone will have to pay for it if things go wrong.
Family and friends
If, like many entrepreneurs, you are struggling to gather the capital to start a business, you may consider appealing to family and friends for help with start-up funding.
Advantage: Because your friends and family are more likely to know and trust you, they are more likely to offer interest-free loans. This could save you a lot of money and trouble in the future. It also means you might be able to get your hands on start-up funding a lot more quickly than if you were applying to a professional source.
Disadvantage: Borrowing from people you have close relationships with can often be more tricky than borrowing from a stranger. You have more at stake than a sum of money - you have a relationship. When around 50% of start-ups fail within the first three years, it's clear to see that starting a business is a risk. From your family or friends' point of view, investing capital in a business you have little managerial control over is potentially even more of a risk. It is important to think very carefully before asking a friend or family member for investment, however desperately you need it. Consider the following:
- What is the nature of the relationship you share with this person?
For example - you might be better off borrowing from a parent than a romantic partner. Parents generally have a clearer idea of your capability to pay it back, and there's less chance of your relationship disintegrating in the event of a financial loss. Taking investment from a romantic partner, on the other hand, introduces a new element of risk to the process. You may not have known the person for very long, and if your personal relationship ends, things could turn sour and the individual may demand their initial investment back before your business is ready to repay.
- Are you certain that their reasons for investing are based on facts and figures, and not on feelings of obligation?
Of course, our family and friends want to see us do well. It could be difficult for them to admit that they think your business idea is terrible, and they could feel pressurised to provide start-up funding regardless.
To avoid conflict and keep your financial agreements as professional as possible, you are advised to approach family and friends in the same manner as you would a formal lender. Be completely clear about your expectations by specifying exactly:
- How much money you require - provide a full list of start-up costs.
- How long you need the money for.
- The repayment level you can afford.
- Specify how much profit they can expect to receive.
- When will the returns be paid?
- Clarify whether or not they will have a financial liability for the business.
Always make it clear to your friend or family member, that their choice to invest is a risk. There is absolutely no certainty that they will make a profit, or even get their money back.
Ask them to lay out their own expectations in writing so you can decide whether or not you can reasonably fulfill them.
By keeping all transactions and agreements as formal and professional as possible, you are helping to preserve your personal relationship.
If you are not comfortable asking family members for help with start-up funding, or if you don't know anybody willing or able to help, then you may consider looking for external investment.
Advantage: The main advantage of taking a bank loan is the variety of options available. After you have chosen from a huge range of banks, you can then choose from short-term finance overdrafts, asset finance and leasing, working capital funding invoice finance and fixed asset loans among many others. You may wish to consult your accountant for help with settling on the most appropriate option.
Another advantage of taking a bank loan is accessibility and security. You can, to some degree, trust your bank to deal with your loan professionally and to adhere to the agreed legislation. Borrowing from a bank is much safer than borrowing from an independent company, although you must ensure that you read all small print and understand exactly what it is you are agreeing to before borrowing money.
Disadvantage: Procuring a bank loan can often be a lengthy process and many start-ups do not succeed in fulfilling the required credentials. Banks often shy away from start-ups due to the high risk of them failing. Often the interest rate on bank loans is extremely high and toleration for non-repayment is zero.
If you are unable to organise a bank loan, you may wish to look at other secure start-up funding options. These could include:
- Commercial loan providers - These are similar to banks, except they do not offer additional services such as savings or deposits. They simply focus entirely on loans.
- Peer-to-peer lending - Otherwise known as 'social lending', this form of funding takes the institution out of the process and relies in part on the philosophy that borrowing from within your community introduces an emotional element to finance. Quite simply, if an individual has spare money, they can choose to lend it to people who need it. Unlike in banks, where the process of transaction is impersonal and mechanical, people who use peer-to-peer lending are less likely to borrow irresponsibly or not pay back.
- Social and community lending - Credit unions lend money at a lower rate than banks and often offer funding for social enterprises, community businesses and disadvantaged groups.
- Sharia-compliant funding - 'Musharaka' is an investment system based on Islamic principals. It offers a partnership based on the mutual agreement that all parties share profit and losses. According to Sharia law, making money from money is prohibited and wealth should only be generated through asset investment and legitimate trade.
If you would prefer to avoid the high interest and risks association with bank loans, you may wish to consider selling a small portion of your business for a fee. This is known as private equity. You can sell shares to:
1. Venture capitalists - Venture capitalists are firms rather than individuals. They tend to be more interested in businesses that already have successful founders, and usually offer over £1 million for investment.
2. Business angels - Like the successful business people on BBC's Dragon's Den, business angels are usually high net worth individuals who choose to invest both their interest and cash into appealing start-up ventures.They tend to offer between £10k-£100k individually, but can pair or group up to offer more. They tend to be hands-on and willing to involve themselves in the business at hand. Business angels are also more willing to invest in early-stage start ups that interest in them.
Advantage: Unlike with loans, you do not have to pay interest on shares. The liability rests on the shoulders of the shareholder. If someone chooses to invest in your business, they are essentially agreeing to a loss if the business fails in the future. It means you get immediate access to capital, without any liabilities further than the initial investment they paid. If a shareholder (such as a business angel or venture capitalist), invests their knowledge and experience as well as their capital, your business is far more likely to succeed.
Disadvantage: When you sell a share, you are selling a portion of your business. In other words, you are giving up an element of control. This puts your business and your role in your business at risk. You may not like the suggestions of your investor or investors, and rifts may form, causing the foundations of your business to weaken.
The government runs a selection of investment schemes for new business ventures. For a start-up to qualify for a grant, it must fit a certain criteria. Factors affecting your grant eligibility include:
Location - Every county in the UK has a range of grants on offer for local businesses. Counties with an above average rate of social deprivation or unemployment tend to get more funding for grants as an attempt to rejuvenate the area.
Size - Grants can be awarded depending on the proposed size of a business. small to medium sized enterprises (SMEs) are more likely to receive funding due to their economic value.
Sector - Government funding for certain industry sectors are restricted by the European commission. Funding cannot be awarded to the following industries:
- primary production of agricultural products.
- processing and marketing of agricultural products (in most cases).
- synthetic fibres.
Purpose - What is the specific need for the grant? Is it machinery? Improving office space? Increasing employment? If the specified purpose looks likely to prove a significant benefit to your business, then the grant is more likely to be offered. The awarding body will expect a high level of commitment from your business to make the changes commercially viable.
Extra support is also available for specific groups of people, including:
- disabled people
- ethnic minorities
- young people.
If you think your business is ethically and economically beneficial to wider society, you could be eligible for a government grant. It's always worth conducting research to see what extra support you might be entitled to.
How can an accountant help with start up funding?
It may seem counter-productive to spend money on an accountant when you are struggling even to finance your new business. However, hiring a financial expert at this point could save you a lot of money in the long run. An accountant will be able to check your financial forecasts, make sure all costs and calculations are reasonable and help you to have the best chance possible of receiving funding.
Start-up funding from family and friends
One of the problems with asking for help from family and friends is that, because they may not be financial experts, they might not know if there are mistakes in your financial forecasts. For this reason, they could be offering investment blindly. Consulting an accountant beforehand will ensure that all figures are correct and that the agreement you make is completely clear and fair on both sides.
Start-up funding from banks and professional agencies
Professional loan companies and banks expect a high level of professionalism. An accountant will ensure that your business and financial plan is a tight and fool-proof as it possibly can be, increasing the chances of you receiving the required funding.
Once you have your accountant on board to help with your business and financial plan, he or she will be able to advise you on other possible funding methods. Because many accountants have excellent experience in business, they will know if you're likely to qualify for a community grant or not.
Hiring an accountant is an investment. Building a solid business relationship at an early stage will ensure that your business is as solid as it possibly can be. You will benefit from the experience, business acumen and financial expertise of a qualified accountant.
To find out more about how accountants work and how to find one suitable for you and your business, please visit our accounting FAQs.
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