External finance for start-up businesses is a bit of a contentious topic. When you’ve worked so hard to grow your business from the ground up, the thought of jeopardising your long term success by seeking external funding is a bit daunting, particularly when you lack experience in commercial financial matters. Well fear not, because our guide to the best sources of finance for business start- ups is here to help.
Friends and family are a common source of funding for start-ups, but mixing your personal and work life can get messy; very messy! So, before you go cap in hand to the bank, here are a few other business finance solutions to consider.
Short-term finance options
Regulating cash flow is one of the main problems faced by start-up businesses. It is essential to maintain a healthy level of cash flow to ensure bills can be paid, stock can be ordered and business opportunities can be taken advantage of as and when they arise.
The benefit of a short-term finance option is the ability to borrow money as and when you need it. The terms are flexible, allowing you to borrow anything from £3,000 – £50,000, and you can choose a repayment period to suit you. You can also pay off the loan whenever you wish and save on mounting interest charges.
Everyone who starts their own business is passionate about their idea, but some start-up owners will go one step further and back their venture with cold hard cash. Such an approach can make good business sense, as you won’t have to worry about the interest repayments associated with external sources of finance, so it’s essentially free money. On the other hand, it’s your money, and you could lose it all, so think long and hard before pumping your savings into your business.
One of the boons of a bank loan is the opportunity to create a bespoke product which meets the particular needs of your business. Bank loans come in all shapes and sizes with repayment terms which can be negotiated to suit you. There are also overdraft and short term credit facilities available to provide a welcome safety net.
There plenty of well documented negatives associated with bank loans. Firstly, there is no guarantee you’ll be accepted for a loan, and even if you are the interest rates offered to start-ups can be high due to the additional risk they represent. The bank will also require a detailed business plan before agreeing any finance deal, using up valuable time which might be better spent on the day-to-day running of your business.
Despite there being a wide range of localisation specific grants available from the government and your local authority, receiving a grant is certainly no guarantee of success. The grant application process is often complicated and strict eligibility and criteria must be met. There’s also plenty of competition from other small business for a finite pot of money.
Asset finance is a method of securing the funds you need to purchase a business asset, such as a company vehicle or a piece of machinery. The loan is structured in such a way that you effectively rent the machinery from the asset provider until such a time when the loan is paid off; only then does the business own the asset.
The advantage of asset finance is the ability to spread the cost of an asset over the duration of its use. On the other hand, asset finance attracts high levels of interest and will require plenty of supporting documentation to prove the significant role the asset will play in the growth of your business before you are accepted.
And that’s it. If there’s anything we’ve left out or something you’d like to contribute from personal experience, we’d love to hear from you, so please leave your comments below.