Once you have researched a market and decided to set up a business, how do you provide the necessary finance to set up a business.
1. Personal Savings – If start up costs are very low, you may be able to set up business from own savings, e.g. small internet business. But, unless you have a very big bank balance, you won’t be able to spend too much.
2. Borrowing from Friends and Family – A potential source of cheap finance, though if things go wrong it can cause personal difficulties.
3. Bank Loan. – The most popular form of business finance. A bank can lend substantial sums depending on the business. The interest rate on the loan could be quite high 5%-7%. Banks may require collateral (assets, like your house) as a guarantee for the loan. To help small business, the government have a small loan guarantee system
4. Business Angels. Business angels are people who invest in business they think has a good chance of succeeding, even when banks are unwilling. (think of Dragons Den). The advantage is that it is a new source of money, and they are unlikely to give money unless they see good prospects. As they have more experience, they may be able to help in the setting up of the business. However, they may require a high % of shares in the company, leading to lower profits later.
5. Government Agencies. Government agencies can often provide loans. These are often targeted towards certain regions and age groups. They can help provide finance without losing share in the business.
- Financing new business at Business Link
- Princes Trust for young people
6. Stock Market. A company could float on the stock market. This involves selling shares in the company as a way to raise finance. The advantage of shares is that the company can decide how much dividend to pay. Thus it can be a cheaper way of financing money than borrowing from a bank. For example, Eurotunnel raised much of its revenue from floating on the stock market. However, selling shares is only really applicable to a large company, like Eurotunnel.
7. Forward Profit Generation. This is a method of using profit generated from existing business to finance expansion. It means you only use profit you make to invest. This is a safe method of investment because you don’t have to borrow. However, you may end up paying yourself very little for first few years and it limits expansion. Depends on type of business whether will be practical.
50% of business fail in first 5 years.