Before you approach anyone for external finance when you’re starting up, you should explore the right funding options for your business needs.
You should think about how much finance you need and for how long. Even if you've already sorted extra finance from investors or banks for example, you'll usually still have to pay for something. Nearly everyone who starts a new business will have to use some of their own money.
How much money do you need to start?
Money is vital for a new business. To start a new business, you'll need enough money to cover both the start-up and early stages, at least until it provides an income.
You should find out how much money you'll need from your business by making a personal financial forecast. This covers living expenses and should provide a realistic figure of how much you need in the first year.
A personal budget is a plan detailing the personal living expenses you’ll need to fund from the business or other sources. It should set limits to the amount you plan to spend each month on items like rent, food and housekeeping.
Tracking your personal spending can help you find out how much money you’ll need to take from the business.
Download our personal budget spreadsheet (XLS, 25K)
You can now work out how much money you will need each month. If you multiply the monthly figure by 12, and make adjustments to cover one-off spending such as holidays or car tax, you will know how much you need to live on during your first year of trading.
Profit and loss forecast
You can also estimate potential profit for a new business using a profit and loss forecast. Profit is the difference between the money your business earns and what it pays out. A profit and loss forecast is a statement of the trading position of your business: the level of profit you expect to make, given your projected sales and the costs of providing goods and services and your overheads.
Your forecasts should cover a range of scenarios. New businesses often forecast over-optimistic sales and most external readers will take this into account. It’s worth including additional forecasts based on sales being significantly slower than you are actually predicting, with one for sales starting three months later than expected, and another forecasting a 20 per cent lower level of sales.
Download our sample profit and loss forecast template (XLS, 50K)
You can also focus on managing cashflow. Cashflow covers payments of money, like wages and for stock, and is essential for a business to continue trading.
Explore your finance options when starting up
Banks might be first place you'll consider for finance. But they're not the only source of finance for businesses.
Before you approach anyone about business financing, you need to know the answers to three vital questions:
- Why do you need the money?
- How much money do you need?
- When do you need it?
Creating a business plan should help answer all of these questions and is an essential part of the process. It will help you to plan how much money you need. You can then use it to help persuade a lender or investor to offer finance.
To be able to secure any type of business finance, you’ll often need a good credit history, although there are options available if you don't have this.
All businesses will have different funding needs and those needs will be different at different times of your business' life. You might need a combination of options as your business develops and your needs change over time. You need to try to find the finance route that's best for your needs, your type of business and with the fewest disadvantages.
Financing your business
Finance options to consider include:
- Non-bank lenders
- Financing from family and friends
- Business angels
- Venture capital
- Factoring and invoice discounting
Use your own money to get started
Nearly everyone who starts a new business will have to use some of their own money. Even if you've already sorted extra finance from investors or banks, you'll usually still have to pay for something.
Benefits to funding your own business:
- gives you more control over your finances and business
- less worries over repaying money
- it can make your business more attractive to future investors - it shows your commitment to making the business succeed
Disadvantages to funding your own business:
- potentially high losses eg your house and other personal possessions
- potential to get into financial difficulty by spending more than you realistically have
There are pros and cons to every potential source of funding. When making funding choice you should always have a realistic and accurate business plan which includes a cashflow forecast.
See our guide on cashflow management.
Options for self-financing your business
The easiest way to self-finance your business is through your savings. A common mistake though is to put every penny you have into the business with nothing in contingency for a bad month. You should consider keeping a contingency fund back to cover 6 months worth of expenses.
You could also consider:
- working part-time
- applying for additional borrowing on a mortgage
- financing from family and friends
- taking out a loan or using a credit card
- using a windfall payment - eg redundancy, inheritance or maturing ISA
- cashing in premium or investment bonds or selling shares in another business
- selling personal assets – eg car, property or jewellery