How can you finance a business?

Finance a new business

How can you finance a business?

With the current economic climate of high inflation, global uncertainty, and the backdrop of war, financing a new business might seem a challenge.

However, with planning, careful research and professional advice, you can find the right financial solution for you.

If the traditional funding route is problematic, other forms of finance may also be a good option and are generally easier to obtain than bank funding.

Crowdfunding, angel investors, and other alternatives for funding can provide flexible options and may not require an extensive credit history of a bank loan.

Lack of preparation

Persuading a financier or financial institution to lend your business money is like getting a mortgage.

You need to prove you can afford the loan, have the initial equity to kickstart the company and have a clear repayment plan.

However, if you are not ready to invest in yourself, why should they?

With most loans, you need to provide some collateral should you default on payment. Lenders will want to see a clear business plan and an indication of income to support regular repayments and interest.

Planning is the key

You know the saying, failure to prepare is preparing to fail?

You must have a business plan. Unfortunately, many start-ups apply for finance without preparing a business plan.

To persuade a lender to part with the funds, a clear and costed business plan is essential for them to see your goals and, specifically, how you intend to reach them.

Choosing equity or loans

Friends and family, online angel investors and crowdfunding platforms can all give equity investments.

Equity is less risky than a loan because there is typically less or nothing to pay back. Instead, investors enjoy a cut of your profits by being given shares in your company.

Although freeing up the additional funds needed early on in a business, conflict may occur if the investors are friends or family. 

On the other hand, a bank or lender doesn’t have any ownership of your business and has no say in how you run your company.

A loan can be short-term or long-term. Whatever the terms, you must pay the money plus interest back within the agreed time frame.

If you are unsure which option is best for you, speak to a professional adviser beforehand.

Know your borrowing limits

It might seem obvious advice, but you should not borrow too much or too little. Have a clear conversation with potential lenders about how much you need and how much they think you can afford.

You shouldn’t make the mistake of asking for more than you need, but it is a good idea to build a contingency into the amount of working capital you budget for, in case something unexpected arises.

Make sure you manage your credit score

Your credit score will always be a factor when a lender considers offering you a business loan.

If a business owner does not take care when managing their personal credit, a lender may think they run the risk they will take the same approach to business credit.

Managing your credit is critical and starts with knowing your current score. Create a plan to improve it if necessary.

If you are starting or scaling up a business, seek professional advice on financing from our team.