How to finance a Business - a Guide to getting your funding right
Starting or buying a business is a dream for many people, but some budding business owners are put off by the perceived financial implications, risks or uncertainties. That’s understandable, but it really isn’t the insurmountable hurdle you might think it is. If financing a business was so much of a problem, the economic outlook would only ever be bleak.
Let’s face it, the economy needs small businesses. The banks need to lend money to businesses. So, feel reassured that, if this is your first foray into financing a business, you’re treading a well-worn path and there are plenty of options available to you.
How to finance a business - The first steps
To begin with you need to take a good look at your own personal finances – and be thorough in your assessment of both your current cash position and your outgoings. How much liquid capital do you have? And, by that, we mean the money there is in your savings and bank accounts right now, clear of any borrowings, that you can release at this moment. Not quite enough to finance a business in its entirety? Then this could also be the time to determine what you can sell that could raise some extra cash? Find time to raid the attic, ramp up your e-bay listings and make some money out of those never-used items!
When assessing your daily outgoings, it’s important you take into account what you, and your family, need to live on. And be realistic with the numbers. There will be elements that you can sacrifice – such as takeaways, holidays and luxury items. But make sure you factor in all personal overheads and plan for any unexpected costs that you might incur, such as a broken-down washing machine, a failing boiler or emergency car repairs.
No doubt you’ll be aware that how you remunerate yourself from a business is very different from a PAYE situation. You pay tax, of course, but at differing amounts dependent on how your company is structured, and who in your family is drawing an income, or a share of the profits, from your business. There’s no doubt that HMRC has tightened up lots of loopholes, but you should still still be financially better off as a successful business owner than you would be an employee – especially if you take good advice and get a decent accountant. A business can deliver a better income for you and your family in time. But, remember, if it’s a new venture, you need to factor in a growth period during which you won’t be able to draw a large income from the proceeds.
Financing a business - The next steps
What type of business are you thinking about buying, and what is its track record? Is it on the up, stagnating or declining due to a specific set of circumstances (such as the existing owner’s ill-health, impending retirement or a change in the market?)? Is it a premises-based business, does it employ staff or is it a lower-overhead model? All of these considerations will have an impact on how a business purchase can be financed. The important facts for any lender, though, is the likelihood that they are going to get their money back.
What about buying a franchise? There are several proven statistics that demonstrate a franchise is a safer investment than a stand-alone business. This is because, as a franchisee, you are part of a bigger brand with a wider support structure. And, for that reason, the banks are very keen to offer finance to franchised businesses. The latest British Franchise Association and Nat West survey shows that the franchise industry is in rude health. It generates some £17.2bn to the UK economy, employing 710,000 people and, importantly, had 93% of franchisees claiming profitability in 2018. Moreover, the report shows franchising is a very resilient business model, with a fewer than 1% closing down due to commercial failure. This, of course, is good news to financial lenders.
It doesn’t matter who you approach to help with financing, you’ll need to put together a business plan. There are plenty of templates and guides on line, and good advice in the articles featured on DaltonsBusiness.com. But, in short, there are a few key points to consider. Being overoptimistic isn’t wise when putting together a business plan, so always err on the side of caution and have extra working capital to cover quiet periods. Ask for all the money you need too. It’s far better to overestimate your requirements than go back to the bank – or lender – further down the line, cap in hand, asking for more money. And have as much evidence to support your application as you can – a lender will feel more confident in financing your business if they can see you have done your homework.
Finance to buy a business – the final step
So, who do you approach with your business plan and loan application then? There are several business funding options available to you these days, and more than ever before that are outside of the traditional lenders. But, for most people looking to finance a business purchase or start-up venture, the banks will be their first port of call. If you’re interested in a traditional bank loan, you can apply for both unsecured or secured loans. Unsecured loans are typically quite quick to arrange, depending on the type of business and applicant. With these, you don’t put up any assets as security but, as such, you will incur higher interest rates. Secured loans, on the other hand, use some of your business – or personal – assets as security and, typically, offer much lower interest rates.
Another business financing option is to look at any government lending – or grants – available to you. There are many schemes that offer financial support for start-ups and existing businesses. Asset financing is worth a look too, if there are equipment costs that you need to account for. Asset financing can also be used in a refinancing capacity to release cash that’s tied up in the value of existing assets. Cash can also be raised through invoice financing if there is money owed to the business from any outstanding invoices.
Angel investors – high net worth individuals who use their own money to invest in other people’s businesses – have been around for some time. They, and Venture Capitalists, can be a good source of finance, but be prepared for a Dragon’s Den type arena. Crowd and peer-to-peer funding, alternative sources of finance to buy or start a business, have risen in popularity over the last few years, driven by the growth in online platforms that allow businesses to raise small sums from multiple investors. Typically, this will be in return for access to products before they are made more widely available to the public or at heavily discounted prices for early investors. Or, in some cases, it might be for a direct equity stake in the business.
Finally, there are a couple of additional business financing options to consider. One is to ask the business owners themselves whether they might consider an earn out. This is where the seller is paid a proportion of future revenues over an agreed period, effectively ‘loaning’ you the funds to buy their business. Or what about somewhere even closer to home? Lots of business start-ups have relied on finance from friends and family. But, a word of caution here, as it is important to separate business from friendship – and even from family. Make sure any loan, and its terms, are drawn up properly, ideally with the assistance of a professional outsider such as a lawyer or accountant.
How to finance a business – The Final Word
The key message here is that, if you’re ready to start or buy a business, there are plenty of sound funding options out there for you. Financing a business needn’t be daunting, and thousands of people do it here in the UK every year. Read through the guide again or take a look at the dozens if useful articles published on www.DaltonsBusiness.com.
Summary - How do I finance a Business?
Take a look at your personal finances
- To make sure your new venture doesn’t fall at the first hurdle, know what you need to spend every month to live and survive long before you invest in a business.
Get your own house in order first
- Scrutinise all aspects of your personal finances, make sacrifices where needed, then be totally honest and accurate in assessing your liquid capital position.
What type of business are you looking to finance?
- If you’re borrowing for a start-up, you’ll need some projections; if it’s for an existing business you’ll need evidence of past performance and administrative costs.
Consider getting finance for a franchised business
- -Franchising is a proven business system that gets lenders excited as their risk is somewhat mitigated. And that can mean better rates or extended terms for you.
Put together a business plan
- Arguably the most important part of the process of securing finance for a business. Take care to get this right first time and be honest rather than over-ambitious.
Approach a suitable lender
- With more business financing options than ever before, you’re bound to find a solution that suits you. Happy hunting and good luck with your next venture.