If you’re contemplating starting your own business, chances are the prospect is consuming your thoughts for most of your waking hours. You’ve got the ideas. You’ve got the determination. You’ve done your research. You know you can make it work. What’s holding you back? For many would-be entrepreneurs, the biggest hurdle they face in starting a business is raising finance.
4 ways to raise finance for your business purchase
Like first-time property buyers, unless you’re fortunate enough to have received an inheritance from Great Aunty Mabel or have a wealthy and generous family, the odds can seem stacked against you. But, if you’re serious about pursuing your dreams, there are many different ways you can finance your business start-up if you know where to look.
1. A Franchise
A franchise can offer a relatively low-cost and low-risk introduction to business ownership and the choice of business available is huge, from cafes and restaurants, to window cleaning, pet supplies and beauty salons. Start-up costs for franchisees can start from as little as £1,000 and banks look more favourably on requests for finance from franchisees working within an established and proven business model. However, bear in mind you will need sufficient working capital to cover overheads. You will also be expected to pay ongoing royalties to the franchisor – bad news if you’re operating on a tight margin. The biggest downside, though, for many would-be entrepreneurs is the fact that you will be required to run your business in line with company policies and procedures, which you may find inhibitive and frustrating.
If you think a franchise might be for you, seek advice from a specialist business transfer solicitor, such as Truelegal, before you sign any agreements. A solicitor can review the franchise agreement and related documentation for you and talk through the financial implications so that you go into your new business venture with your eyes wide open, fully understanding the pros and cons.
You may be able to raise finance to start your business from third parties willing to invest in your business in return for shares. Such investment may come from a number of sources, including family and friends, a business angel or venture capitalist, a joint venture with a business partner, or even the seller if they are prepared to buy shares in the business as payment in whole or part. If you have assets available to give as security, for example, property or equipment, you may also be able to borrow money against those assets.
Selling shares in your company may raise capital but will also dilute your ownership of the business and could affect decisions about its future operation. You should always, always draw up a legally binding shareholders’agreement, even if your investor is a family member. Trulegal’s solicitors can help you draw up a watertight shareholders’ agreement and explain, in plain English, exactly what the financial and operational implications are. Trulegal may also be able to put you in contact with a business angel (an individual with business expertise looking to invest in promising start-ups) although bear in mind that such individuals are usually looking for a quick and healthy return on their investment.
3. Bank Loans
Between 60% and 70% of all business buyers approach a bank for a loan to start up their business. But, if you’re thinking of going down this route, you will need to do some thorough preparation and go armed with the following information:
- Collateral equivalent to the loan value to offer as security (for example, equity in your house or business assets)
- A detailed business plan, setting out how much money you need, how long you will need it for, what you intend to use it for, how long it will take you to repay and what risks are involved
- Audited accounts for the business in question – usually 3 years’ worth – including existing and projected cash flow
- A professional valuation of the business in question
- Your CV – a bank will want to know what relevant experience you have for running a business
- An asset and liability statement, showing what you own and what you owe
- 6-12 months’ worth of bank statements
- Proof of your identity and residency status
You will generally only have one chance to create the right impression so it pays to seek professional advice in the preparation of your supporting documentation. Clearly, you will be expected to repay your loan over an agreed term. It’s important here not to just focus on the interest rate but also the term of the loan in assessing whether the loan is affordable. A longer term with a slightly higher interest rate could work better for your business in terms of its ability to meet monthly repayments.
4. Grants and Other Funding Sources
If you don’t have any equity to offer as collateral for a bank loan, an alternative source of finance may come in the form of a grant. There are many organisations that offer grants to business start-ups – too many to list here – and it will take time do research what’s available. However, grants can provide a welcome boost to start-up funding.
You may also be able to take advantage of a government-backed scheme such as the Enterprise Finance Guarantee Scheme which was launched in 2009 specifically to support businesses with insufficient security or track record to secure a bank loan. The scheme is managed by the British Business Financial Services and guarantees 75% of a loan while the borrower pays 2% per annum pro rata on the whole amount borrowed. Loans range in size from £1,000 to £1 million and are available to businesses with a turnover of less than £41 million. Repayment terms vary between 3 months and 10 years.
A Word of Warning
Finally, as you weigh up the options for raising finance, remember it’s not just a case of raising finance to ‘start’ your business, you need to run it too, and that means ensuring you have sufficient capital to act as a buffer until you’re up and running.
Costs you will need to factor into your start-up costs include: the cost of paying off any debts associated with the business; the cost of working capital necessary for you to run and market your business; any restructuring costs (eg, redundancy) or refurbishment costs; and the cost of any post sale investments such as new equipment or rebranding. It’s important that you take the time to calculate these costs in detail or you could find your new business venture falling down around you before you’ve even had the chance to celebrate your first anniversary!
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The sooner we become involved in the process of helping you to buy your business the more likely it is that your purchase will be successful, so if you have a question or concern about starting your business please contact us today.
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