Is start-up business finance right for my company?
We take a look at the advantages and disadvantages of everything from crowdfunding to bank finance and specialist lenders
When you are looking at financing a new business there are several ways to go and choosing the right one can be tricky.
You’ll find yourself asking: what is the best way to fund my new business? And is start-up business finance even right for my company?
The first option is to finance the business through equity – which involves an investor buying shares in the business.
Maybe you have a stack of personal cash sitting around, investors ready to commit or friends and family that are happy to buy in. The problem of course is that in the last few cases you’ll be giving up an amount of the business and control in exchange for investment and with it a percentage of the profit.
Investing your own personal cash may be a mistake if you struggle to find enough additional funds to live off.
You could go for a personal loan or re-mortgage, but the risk is that these are personal and not in the business. If you are looking for the protection that a limited company brings then you’ll lose that by taking out these types of funding lines. In any case they may not be available for start-up businesses.
Another option is to go for crowdfunding. This either takes the form of equity investment where the crowd buys a portion of your business, in which case you have the downsides we have already explored or alternatively a loan facility.
Crowdfunding can be great for established new businesses but often they will require at least some track record. Also, it can take quite some time getting the proposal together, launching it on the platform and waiting for the individual bids to roll in before you finally get any cash.
Going to your high street bank is an option. However, there has been a fair amount of criticism in recent years about the banks’ lack of risk appetite and strict lending criteria. The product structures can also be a little restrictive which isn’t always helpful for start-ups.
Complaints have also been made about the speed of decision making, especially in the start-up arena as it seems that staff are required to be generalists rather than specialist business lenders and it takes time to get them comfortable with your business model and plans.
It’s fair to say that not all the established high street banks are as bad as each other but the evidence appears to suggest that the landscape is patchy to say the least.
Alternatively, finance can be sought from a specialist start-up lender such as Nationwide Corporate Finance.
A specialist independent lender will have products designed for the marketplace with variable payment plans and terms more applicable to the likely cash flow of a new business. Alongside this the application process should be slicker given that they know already that the business is new and there won’t be a track record they will tend to look at other criteria on which to base their decision making.
If you don’t have a huge amount of personal cash, then the ideal answer for many businesses is to take a portfolio approach to funding your business. Enough equity funding to give a bit of cash but not too much to lose control (and profits), a little personal cash for working capital and start-up business finance to provide the backbone of the early costs.
Without doubt start-up funding can be a valuable source of finance for new businesses and should certainly be considered as part of your business plan.