An early challenge for anyone about to start in business is to convince investors or lenders to risk their money. Even if you have all the finance that you require, you should ask yourself the same difficult questions that an outside investor would ask.
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Preparing a detailed business plan, with rigorous market research will help to convince investors that you have thought carefully about what you are doing. But you will also need to show that you have the determination and commitment to succeed.
What are the main options for raising money?
There are various possible sources of money for your business:
- The first is that you provide all the money from your personal resources, but that is not an option open to everyone.
- Equity - Venture capital firms (including the Government supported regional venture capital funds) and business angels can provide equity investments in exchange for shares in your company. They will be looking for above-average returns and an exit route, usually within five years. They will probably want some say in the way that the company is run, though can also be an excellent source of expertise and contacts.
- Loan finance - You will keep total ownership and control, but may find that you need to provide personal guarantees. Lenders will look at the gearing (the ratio of loan finance to total finance) and will not lend if the gearing is too high. They will also look at interest cover - the number of times that the forecast profit exceeds the interest - and will not lend if it is too low.
There may also be grant aid available - from the Government; from your local authority; from your regional development agency; or from the EU. All of these have their own eligibility criteria, so in the first instance, contact your business adviser.
Once you are in business, retained earnings are an important source of finance. If you are starting up, or are already in business and want to expand, then there are really only two sources of finance: equity and loan finance.
For more information on Raising Finance click here to view NatWest's ‘Getting Funding’ guide.
Top Tips
- The key to raising finance is a solid business plan, with rigorous market research to justify your sales forecasts, together with a demonstration of your determination and commitment
- Talk to your bank at an early stage about what they require from you to support a loan application.
- Seek appropriate advice. In the first instance, try one of the Government funded business support agencies (Business Link) or one of the networks of Local Enterprise Agencies.
- Explain to prospective funders your total financial requirements, split into capital for fixed assets and working capital.
- Don't expect funders to say yes straightaway. If they refuse support, ask for feedback, address the issues, revise your plan and go elsewhere.
- If financiers question the viability of your idea, perhaps you should too
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