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Funding
Financing your business through grants
There are many ways of funding a new business, including using your
own capital or drawing on existing assets like property. However, there
are also business grants and awards which could give you the capital
you need without risking your own money.
There are many types of grant, for example for a specific project or
research. There are also government funds available for training and
development in assisted areas.
Grants and awards are particularly appropriate for:
- Business start-ups
- Younger people in business
- Businesses in urban areas with below-average employment levels
- Businesses in rural areas
- A business which has a specific project it could not otherwise undertake.
Whilst you do not usually need to repay a grant, they can be difficult
to obtain and are often limited to specific projects or locations. However,
if you are starting out in business you will already be familiar with
the maxim “if you don’t try, then you won’t know”,
so investigate the grants available to you as you may be eligible. You
can get information from local authorities, Local Enterprise Agencies
(www.nfea.com), Learning and Skills Councils (www.lsc.gov.uk) and Business
Link (www.businesslink.gov.uk) You should also undertake your own research
to find more obscure sources of grants. The Internet is a good resource
for this.
Other resources for Government grant initiatives include:
BERR - Enterprise and Small Business www.berr.gov.uk
Encourages business start-ups in disadvantaged communities and groups.
The Prince’s Trust www.princes-trust.org.uk
Are you aged 18-30, unemployed, have an idea for a business but can't
raise all the cash you need from anywhere else? The Prince’s Trust
could help you get up and running.
European Community funding
Funding for research and development is available through a number
of schemes including the European Regional Research and Development Fund.
Try www.grantsonline.org.uk
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Finding the money to start a business
There are many ways to fund a business, and each has its own risks,
advantages and disadvantages. Below are some of the ways you can secure
funds for your company.
Using your own assets
If you have capital such as savings, or equity in your home or pension,
you can use these to finance your business. If you want to raise funds
from a lender, they may want to see you invest your own capital first.
Be very careful when using your home or other essential asset to finance
a business. Consider what the loss of your property would mean to you
and your family, and build mortgage repayments into your business and
financial plans. Losing your business is bad enough, but losing your
home is heartbreaking. Protect yourself with insurance and seek professional
financial advice before releasing equity. You can also use a mortgage
against a new property such as business premises to fund your business,
by overborrowing.
Borrow the money from friends
Many people fund their business with goodwill loans or investment from
friends or family. It’s a great way to secure capital and could
mean a nice return for them in interest or dividends when your business
blooms.
However, you cannot risk personal friendships and relationships over
something like money, so protect your interests and theirs with proper
documentation, outlining how much you are borrowing, under what terms,
and how much interest is payable. If necessary, seek professional advice
to help you draw up this document so all parties are aware of the terms
of the deal.
Ask your bank
There are two ways to borrow from a bank: overdraft, or loan.
An overdraft is a quick-fix if you are in a tight spot financially.
The bank will let your business borrow a fixed amount without notice
and you pay interest daily. The advantage is that you only pay interest
on what you borrow, so you can use it as a flexible cushion for difficult
periods. However, it is an expensive way to borrow and should not be
used as a long-term financing option.
A bank loan is an excellent way to raise capital if you can offer security.
Many banks do not like to give unsecured loans to new businesses, so
if you cannot offer security then you might have to investigate an alternative
such as the Government's Small Firms Loan Guarantee Scheme.
However, if you can prove a steady cash flow, your bank may offer you
a small unsecured loan, but you will need to make the monthly repayments
regardless of how your business is performing.
Use credit card
Credit and charge cards are a flexible and convenient short-term method
of paying bills or buying supplies, but can be an expensive way to borrow
if the full balance is not paid off monthly. You are likely to write
fewer cheques which will reduce your banking charges, but the APR of
most credit cards means expensive interest repayments if you can’t
meet the whole amount.
Find a venture capitalist
Venture capitalists (VCs) are professionally-run fund management companies
who invest in your company in return for shares and a say in the running
of the business (usually in the form of a seat on the board).
Investors demand hefty minimum returns of between 30 and 40% per annum
over five years and will be looking for new opportunities in proven markets,
so you need to ensure your idea is a viable and dynamic one.
Business angels
A business angel is a private individual who is willing to provide funding
in a small business in return for shares in your company (and therefore
a share of the profits). Many business angels are a great source of wisdom
and business knowledge and are more like an informal partner than an
investor. To consider your business attractive, they will want to see
a comprehensive business plan and evidence that your business is viable.
Talk to your local Business Link for more information on how to attract
a business angel.
Grants
There are many different types of grant, but many are difficult to get
so you will need to do your homework and prepare a good business case.
Your local Business Link can help with information on the grants you
might qualify for.
See the factsheet “Financing
your business through grants“ for
more information.
For information of users: This material is
published for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and no action
should be taken without consulting the detailed legislation or seeking
professional advice. Therefore no responsibility for loss occasioned
by any person acting or refraining from action as a result of the material
can be accepted by the authors or the firm.
© Copyright JE Consulting 2008.
All rights reserved.
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