If you need money to finance your startup, you need to have a business plan in order to convince the lender that you can pay it back. There are a variety of ways to finance a start-up, but what kind of capital should you seek?
Equity
Equity is the capital the owners invest in the business, from their own resources. The advantage to equity is that there is no interest charge and a return is only paid to the investors if the company is making a profit.
There are two main sources of equity:
- Funds from personal wealth
- Profits generated by the business after a takeover
If you are contemplating using your own funds to finance your business start-up you should get advice as to the most tax efficient method of investing your hard-earned money.
Obtaining funds from family or friends can seem an easy and convenient way to fund your business, but there are a number of points to consider. For example, it is essential business practice to enter into a written agreement as to the precise terms on which such funds are sought and given. It is often too late some years after the money has been given to the business and a problem has arisen, to recall the terms on which the funds were procured. Discussions as to what people ‘thought’ was agreed invariably end in a confrontation and can ruin otherwise long-term friendly relationships.
Equity is free to the business on a day-to-day basis. If the business is in need of additional funds it may be an option to seek additional business partners, as an alternative to debt. Be careful though, because many business people make an early and costly mistake by ‘giving away’ equity stakes in their enterprise to secure start-up funding. If your business idea has real potential in the longer term, early equity disposal can eventually prove very costly for you. It is essential that the investor also brings experience and other abilities.
If you are going to take equity partners, be sure that there is an agreement in place from the start so that the investor knows what they are getting and how they are to get their investment back at a later date. One or two ‘reasonable’ sized investors are better than a number of small investors. Too many small shareholders can prevent further investment, perhaps from Venture Capital Funds, by creating too much investor ‘clutter’.
Venture Capital Funds
These are available to invest in business projects. Venture Capital seeks out worthwhile projects in need of funds at a critical stage of enterprise development. Venture Capital Funds generally want their money back over a shorter term than most other fund sources and accordingly, impose strict conditions on their investment terms as to repayment time scale and equity stake.
When dealing with Venture Capital Funds, you must be conscious of the precise detail of any agreement entered into. Venture Capital Funds have a tendency to put increased pressure on non-performing enterprises that return looking for further investment. It is prudent when seeking Venture Capital Fund investment to be sure that you obtain adequate funds to deliver the expected results at the first attempt, otherwise you may find that you literally have bitten off more than you can chew and any second bite leaves a lot less of the ultimate pie to be enjoyed by you.
Some agencies, such as Enterprise Ireland, have a panel of potential investors who have indicated their willingness to invest in worthwhile businesses. Most of the major accountancy firms and legal practices also have clients willing to take a financial plunge given the right opportunity.
When contemplating such a course, you should attempt to secure the financial backing of someone who knows the nature of your business and can bring more than just money to the table.
Grants
Grants are generally only made available for the purpose of encouraging investment in new business projects under certain circumstances, or in particular industries. Local Enterprise Office Fingal provides a range of grants that you might be eligible to receive. Contact us today and see what financial supports are available to you.
Banking Institutions
A business loan from a bank is another way of financing your business. In most cases, having a good Business Plan is essential to convince the bank that you are worth backing. Often, a bank will ask for personal guarantees or other forms of security. Remember that risk reduction is the name of their game and it should be yours, too. Never offer security, especially if you are confident Business Plan stacks up. Finally, remember to shop around, there are many banks that may have different lending criteria for new businesses.
Dealing with Your Bank - Do's and Don'ts
Do:
- Be prepared when meeting your bank
- Keep your bank informed in good times and bad times
- Choose a bank close to you
- Shop around before choosing a bank
Don’t:
- Be afraid to ask
- Make unnecessary trips to the branch. Take advantage of online and phone channels that your bank will offer
- Forget to take advantage of cost-saving facilities that your bank will offer. If you use online and electronic transfers you will save on transaction fees, stamp duty, postage and your own administration
- Try to deceive your bank
- Go over your authorised limits. You will have to pay a charge if you go above your authorised overdraft limit.
Credit Union
Don’t forget your Credit Union. If you are not already a member of one, you should consider joining. You may well be able to borrow three or more times what you have in shares, over an agreed and extended period of time, even though the interest rate may be high.
