Finance and grants

Business link

Choose the right finance when starting up

Every new business needs money when starting up. The majority of businesses will need to buy equipment, establish the workplace and meet marketing costs - all before the first sale is made. Then once you're trading, you'll need cash to pay the bills and keep the business going.

There are a range of financing options when starting up and choosing the right ones for your needs is essential. You can use your own money, borrow from banks, family and friends or attract outside investors. Grants and government support may also be available.

Most businesses use a combination of these alternatives, according to their specific needs and circumstances.

Key points from the business link website:

• When starting your business, you need to prepare a business plan. This plan sets out how you intend to operate your business and includes essential financial forecasts.

• Use your business plan to explain your business to your bank and other potential sources of finance. A good plan helps convince them that you know what you are doing and that it is worth risking their money backing you.

• Customers may not pay you immediately - but you will 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.

The type of finance you choose will depend on what kind of business you are starting, how much money you need and what you will use it for.

• Many people use their own savings or personal borrowings to fund the business. This may be the only choice if you can't convince anyone else to lend you money or invest in the business.
• Family or friends might back you. However you should carefully consider the risk that they could lose their money if your business fails.
• If you have a credible business plan, you may be able to borrow from a bank. Many businesses use overdrafts for day-to-day borrowing and loans to finance large purchases such as equipment. If your business is likely to have peaks and troughs in its cashflow, it's essential to be able to clearly illustrate these to your bank so you can plan an overdraft.
• A larger business with good prospects might attract outside investors. For example, 'business angels' typically invest £10,000 or more in exchange for a share in the business.
• You might qualify for a grant - for example, if you are setting up a business in a deprived area.
• If your business is setting up in a deprived area, or in a sector that is not normally catered for by mainstream lenders, you might be able to attract finance from a community development finance institution. Alternatively you might be able to attract support from other businesses in your peer group.

Most businesses use a mixture of finance sources. For example, you might invest your own money in market research, bring in outside investors to share the risk and borrow from the bank to purchase equipment and machinery.