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Financing your business

Financing your business

When carrying out your financial planning you need to identify all the items that will need to be paid for along with detailed and realistic estimates of how much these will cost.  You will need to include both:

  • direct costs – the costs of materials, labour and equipment.
  • indirect costs – the overheads associated with running a business – rent & rates, advertising, accountancy, etc.

You all also need to produce an estimate of the projected sales income from your business. Once you have a detailed cost of starting and running your new business, you can then determine how these costs will be financed.

Maintaining Finance Records

When it comes to managing and operating your finances you will need to decide the best process for keeping and filing your records. One of the main things to decide will be whether you do the bookkeeping yourself, hire a bookkeeper or pay an accountant to do them for you.

Seeking Finance

Once you have decided to grow your business and you start to think about seeking finance, there are a number of key questions you should consider before you approach anyone for funding, including:

  • are you ready for financing?
  • what do you need the finance for?
  • how much funding do you need and for how long?
  • what are the right funding options for your business needs?
  • do you have an up-to-date business plan?
  • if you take out a loan, can you afford to repay it?

Types of Finance

Finance options include both internal and external sources of finance. The suitability of each of these options will vary depending on your business.

Internal finance includes such things as cutting costs, using spare cash or offering share options – the things that you can do that don’t require you to involve a third party. You should generally look at internal sources and exhaust these options before you look outside the organisation to raise money.

External finance includes traditional methods of funding such as loans and grants, but there are other external sources such as angel finance and more recently, crowdfunding, which could also be considered.

You need to fully understand these key points before you decide to seek access to finance. This will also help you be better prepared for any future funding application you submit.

Preparing for Financing

Should you decide to seek external finance, you need to work out what is realistic in terms of amount, the timescale and the factors that will affect these calculations. Fundamentally, financial backers will want to know what the funding is for, how long it will last and when you will provide returns.

It is important to be realistic for the stage of development your business is at. For most companies funding levels tend to rise incrementally from small amounts of debt, to more sophisticated facilities (such as invoice finance and leasing), to angel finance, venture capital and public market funding. You will need to consider:

  • How financial institutions view your sector
  • Your management team’s track record
  • Existing and potential future competitors and the economic climate
  • Your existing debt facilities – the difference between what expansion capital you think you need plus everyday overheads as you grow and the availability of your existing facility
  • Your asset backing – any assets you can use as security with investors or lenders
  • Vision – it’s important to have clearly defined goals and ambitions for your business

What will a lender want to know?

Your lender will want to initially gather information about your business which will include some or all of the following:

  • Financial statements;
  • Management accounts;
  • Business plan;
  • Financial / cash flow forecasts;
  • Budget planner;
  • Statement of assets and liabilities and
  • Bank statements

This information is needed to build a picture of your current and forecasted situation, ensuring that the necessary documentation is available to make an informed and responsible decision. It also helps them to understand how your business would service the debt and to identify the most suitable option which doesn’t put your business at unnecessary risk.

The quality of financial and business information provided will impact the decision making process.  The lender will be open and honest about the feasibility of your request and you can be confident that the decision made will be the right one for your business. If finance is refused there should be a clear explanation.