Choose the right finance when starting a business

It is important to be realistic about how much money you need to get your business off the ground.

There is a range of start-up costs that you may need to consider, including:

• business registration fees
• solicitor or accountant fees
• a marketing budget, including your website/logo/social media promotion
• finding premises
• business assets
• business insurance
• stock supplies
• salaries for potential staff
• business equipment, eg computers, office furniture 

Write a business plan

A business plan will help you set out how you intend to run your business and should include essential financial forecasts. These forecasts will help you determine how much funding your business needs. They will show what it is for and when you will need it. See how to write a business plan: step-by-step.

Good planning will also make it easier to raise the money you need by showing potential investors that you know what you are doing and that it is worth investing in your business - see how to use your business plan to get funding.

How much start-up finance do you need and when?

It's essential to have an accurate idea of your startup financial needs. There is a range of start-up costs that you may need to consider. Additionally, you'll need to find suitable business premises and acquire business assets such as business equipment (eg, computers, office furniture), and ensure you have business insurance and adequate stock supplies. The following financial forecasts will help you to calculate how much money you will need to start and run your business:

• Sales forecast - the amount of money you expect to raise from sales - see forecast and plan sales.
• Cashflow statements - your cash balance and monthly cashflow patterns for at least the first 12 to 18 months - see cashflow management.
• Profit and loss forecast - a statement of the trading position of the business: the level of profit you expect to make, given your projected sales and the costs of providing goods and services and your overheads.

For financial forecast examples, download a spreadsheet containing cashflow forecast, profit and loss forecast and sales forecast templates.

Also, customers may not pay you immediately. But, you still need to pay all your bills to keep trading. It's sensible to have sufficient capital to cover projected expenses for at least six months.

At the same time, you need to make sure that you have taken into account how much money you need to live on. In the early stages, a new business is unlikely to produce spare cash that you can spend on yourself. For more information, see how to manage business finance during the start-up phase.

The type of financing you choose will depend on your business type, the amount of money you need, and how you plan to use it. These factors are essential in selecting the best financing option for your business.

Take into account the following finance options for new businesses.

Personal savings and borrowings

Using your own savings or personal borrowings can be helpful. This is especially true if you can't get external finance. See advantages and disadvantages of using your own money to start a business.

Family or friends financing

Borrowing money from family or friends should be approached carefully. You should consider the risk that they could lose their money if your business doesn’t succeed. See financing from friends and family.

Bank financing

Banks provide a range of finance options for new businesses, including: 

• business loans for long-term funding or equipment purchases
• overdrafts to manage daily cash flow. To qualify, you’ll need a credible business plan and may need to offer security or collateral. 

See bank finance options available for businesses.

Investor funding

Selling shares to business angels or venture capitalists can attract outside investors. They provide short-term finance without the need for repayment. It can also bring in expertise along with funding. However, it usually means giving up shares in your business. Investors may want control over its management. Explore shares and shareholders and equity finance.

Grants and government support

There are various grants and government-backed schemes designed to support new businesses. These often come with low-cost finance and business advice but are competitive and have eligibility criteria. Find out about available grants and government support.

Commercial lenders

Consider options from insurance companies or building societies. They often offer good terms and have less strict conditions than traditional banks. You may get a better deal - eg lower interest rates - and they are generally less restrictive.

Crowdfunding

Raising funds through crowdfunding platforms means getting money by asking many people for a small investment in your business. Learn more about crowdfunding for start-ups.

Other sources of business finance

You can seek finance from other areas, like a community development finance institution. This can work if your business only needs a little funding. Or, if you are setting up in a deprived area or a sector not covered by banks or other lenders. See other sources of business finance.

Most businesses use a mixture of finance sources. For example, you might invest your own money to cover market research. You would borrow from the bank to buy equipment and machinery. 

For further information see business financing options - an overview.

Business support finder

The Northern Ireland business support finder is a searchable database that can help you find publicly-funded and not-for-profit sources of business assistance you may be eligible to apply for. Support may be available in a number of forms, including financial assistance and free or subsidised advice services.

See financing your business: the options to watch a video that outlines business finance options that may be available to you.

This short video tutorial outlines the common sources of funding for businesses, including bank finance, equity finance and government grants.

Bank finance includes overdrafts, bridging finance, invoice discounting and factoring, trade credits, business loans, hire purchase agreements, commercial mortgages and fixed asset loans.

Equity finance includes venture capital, business angels, the stock market and crowdfunding.

The tutorial explains the different options under each type of finance, the circumstances they're best suited to, and their advantages and disadvantages.

If you're starting a new business, it's likely that you'll need to invest some of your own money. It can be difficult to borrow from a bank or attract other investors unless you're also investing some of your own money.

The easiest and cheapest way to finance a new business is to use your personal savings. However, this can be risky, and you may not have enough to cover all the funding you need. You could also consider:

• getting a mortgage - or a second mortgage - see commercial mortgages and lenders
• borrowing privately - see financing from friends and family
• getting an unsecured loan, or borrowing on credit cards - see bank finance and advantages and disadvantages of using payment cards for purchases
• selling possessions or assets

You should always think carefully before borrowing. Try to match the loan to your needs. For example, using credit cards for long-term spending can be very expensive. Some loans can be inflexible. You could end up paying interest for many years.

Advantages of self-financing your start-up

Funding your business yourself has many benefits that can contribute to the stability and success of your enterprise. Here are the key advantages of using personal funds for your business.

Exact budget awareness

By using your own funds, you know exactly how much money is available to run your business. This eliminates the uncertainty and time-consuming process of securing external funding from investors or banks.

Financial control

Self-financing gives you much more control over your business finances. You won’t need to repay loans or rely on outside investors or lenders who could withdraw their support at any time.

Retain full ownership

With self-financing, you keep 100% ownership of your business. This means you will get all future profits. You won't have to share them with investors or lenders.

Prioritise business expenditure

Funding your business yourself makes you live within your means. You’ll only invest in essential business equipment and marketing when absolutely necessary. This can help you to prioritise your business expenditure and avoid excessive spending.

Disadvantages of self-financing your start-up

Self-financing your business has many advantages. But, it's important to be aware of the potential downsides. Here are some key disadvantages to consider when using personal funds to finance your business.

Financial pressure 

Using your own money to finance your business may put a strain on your family and personal life. You may not have enough money left over to cover your living costs.

Contingency fund

You should try to leave a contingency fund, to cover unexpected expenses and difficult periods.

Loss of assets

If your business were to fail, you could lose your home and other personal possessions.

Missing out on mentorship and networking

Investors often provide more than just money. They can offer valuable mentoring and networking opportunities. By self-financing, you miss out on these resources. You will need to make your own contacts and find mentors.

To explore other options for financing your business see business financing options - an overview.

Watch a video that outlines business finance options that may be available to you.

Better Business Finance scheme gives small and medium-sized businesses a boost when it comes to applying for loan financing.

Set up with the support of five of the UK's largest banks (Santander, the Royal Bank of Scotland, Barclays, HSBC and Lloyds Banking Group) the campaign has so far delivered a range of initiatives to help businesses understand their finance options and borrowing process, as well as challenge bank's lending decisions.

Betterbusinessfinance.co.uk

First of the initiatives to launch, Betterbusinessfinance.co.uk is a dedicated 'one-stop-shop' website with detailed information on bank finance and lending. It includes details of the campaign and a series of useful resources and factsheets to support start-up or growing businesses.

Lending guidelines

Banks participating in the campaign have agreed on two sets of standards which outline what their customers should expect when applying for a loan. The Lending Code applies to personal and small business customers, whilst the Lending Principles have been created for larger businesses.

Mentoring scheme

A network of business mentors has been established across the UK to support and guide the growth of smaller businesses. Businesses can find mentors on the scheme's online portal - mentorsme.co.uk.

If you are finding it difficult to obtain finance from normal sources - eg from a bank or investor - there are more options to consider.

Social and community lending

You may be able to borrow money from a credit union which is likely to be more affordable than a bank loan. They are owned and controlled by their members. This means they have to make decisions that are in members' best interests, rather than to make money for external shareholders. There are also no penalties for repaying loans early.

Find contact details for your local credit union.

The Community Investment Coalition (CIC) is a partnership of national organisations including financial providers, charities, trade associations and academic bodies.

The aim of the CIC is to promote access to affordable finance for families, businesses and communities. Responsible Finance provides further information on the CIC.

There are various lenders that offer loans to disadvantaged groups, community businesses and social enterprises - see social and community lenders.

Peer group lenders

Some businesses find that they can access finance, support and advice from other businesses in their peer group - known as peer-group lenders. There are many organisations that have been set up to support specific groups of individuals and businesses. These include:

• Women in Business - business support network that aims to equip women with the skills they need to start and grow a business.
• The Asian Business Association - assists Asian and minority businesses by creating access to opportunities and sharing best practice.
• The King's Trust NI can help 18-30 year-olds who are unemployed or in part-time work and are interested in starting a business. You can apply to them for a low interest loan. They also offer free legal advice and many other support services.