Partner Article

Financing your business: Part 1

This is a series of articles written by an entrepreneur who has started, grown and managed a number of businesses. As a consequence of success through hard work, a bit of luck, experiencing good times and not so good times, and now enjoys what has been achieved.

“About the time we can make the ends meet, somebody moves the ends.“ (Herbert Hoover)

The way you finance your business is dependent upon the type of business it is; the markets it is operating in, the potential scale of the opportunity and the rate of growth of the business.

There are a range of finance options available to business. They generally fall into three types; what I call “personal” finance, “conventional” finance and increasingly “co-opted” finance.

“Personal” finance includes; self-funding, friends and family funding and personal debt. This form of finance tends to be the easiest to access and demands the lowest level of due diligence and business validation. It also generally reflects a low level of growth ambition for the business. It can also lead to a great level of stress as the responsibility for family money can reduce your willingness to take the necessary risks in developing the business.

“Conventional” finance involves; bank funding of various types; overdraft facilities, invoice discounting and lines of credit for asset purchases. Venture Capital, Private Equity; this can come in various guises such as proof of concept funding and growth funding. Stock Market listing, a less frequently used funding vehicle but a valuable one for rapidly growing businesses. These types of “conventional” finance are very difficult for start-up or early stage businesses to access. They demand higher levels of due diligence and will probably need third party business validation. You will need to be investment ready in order to engage in the process of raising these types of finance. Accessing this type of finance, in varying degrees, represents a higher level of ambition for the business.

“Co-opted” finance: this is a growing area of finance. It reflects the current reluctance of banks and conventional lenders to take risk. It involves angel investors most of whom are entrepreneurs, so are sympathetic to the issues you face. Crowdfunding; this involves donations or product pre purchase options from people who come together on various sites such as Crowdcube, Kickstarter and others. Peer-to-peer loans this involves private lenders on sites such as Funding Circle engaging with creating a relationship between you and the lender. Community development finance initiatives schemes, CDFI’s, these have been set up to help businesses who have little or no access under normal terms to banks.

When raising finance there are clear don’t does; don’t give personal guarantees on loans, don’t forecast unrealistically, don’t use middle men, don’t give up.

It is estimated that at least 50% of start-ups fail within the first two years. The primary reason for this is more often than not because of insufficient funding. The landscape for funding a business has never been so difficult and therefore is driving the need to be creative.

Understand what you need and go and get it.

This was posted in Bdaily's Members' News section by The Secret Entrepreneur .