When starting a business, on average a business’s start-up cost is around 5k and their 1st year expenses are usually round £22k. 1 There are multiple resources available for what are called ‘start-up’ businesses to receive help with their finances. Common resources are from friends and family, investors, start-up grants or bank loans.
In order to successfully survive and fund a business needs capital needs to be raised and a budget followed. A lot of start-ups do not survive more than five years when this is not accomplished.2 There are many factors that can cause this, for example a poor cash flow where invoices are paid late; this may sound small, but it can very quickly become a major issue. A business must stay on top of their customers payment terms and missed payments.
A businesses budget must take into account any essential, one-off, fixed, variable and optional costs. As well as the start-up costs for example advertising, equipment, research and building premises. A lot, of the start-up costs will be one-off expenses but these can be quite large so need to be carefully planned when settling on a budget. 3
Another key to success is making sure you have the correct support for your business to grow, there are pros and cons to all decisions which will be beneficial to some businesses and not others.
Friends and Family
Using friends and family as a source of funding can be very beneficial as it is quicker than other options as well as being more flexible. Contrary to this it can have positive benefits for the family or friends involved if you decide to pay them interest.
Although, this can put strain on relationships making it crucial to understand the risks involved, for example business failure. Any business issues can cause more damage than usual when mixing with family and friends.5
Investors
An investor owns part of the business and puts their money into it. A key positive to an investor is that they usually bring lots experience. As well as this, you are never liable to pay them back any money, unlike with friends and family or a loan. You also do not need a credit history like loans.
Investors usually want a share of any profit, which dilutes your share of earnings. This can affect business growth in the long run. They also usually set goals to hit so there is added pressure for success. 6
Start-up Grants
Grants are free money. Nothing to pay back. They are given by the government to help certain companies start off, although there are conditions to meet. For example, a research and development grant will only support prototype development, feasibility study or a collaboration with academic researchers.
Unlike the other examples start-up grants have stricter criteria more so than loans. They also do not cover the full amount usually 20-50%7
Loans
Loans are beneficial if you do not have any of the options as they can offer good interest rates when your credit score is high. Loans also leave you with full control of your business and are only a temporary cost for a short period unlike an investor. The most popular loan is a bank loan, but there are many comparison websites that allow you to find the right one for your business.
The qualifying criteria can be tough for loans and are heavily dependable on the amount required and credit history. Credit history also controls the interest rate provided. Just like with family and friends this is also a choice that needs risks considered.8
References
[1] https://www.tide.co/blog/business-tips/how-much-does-it-cost-to-start-a-business/
[2] https://smallbusiness.co.uk/business-failure-four-ten-small-companies-dont-make-five-years-2533988/
[3] https://www.tide.co/blog/business-tips/how-much-does-it-cost-to-start-a-business/
[4] https://www.google.com/search?q=business+funding&rlz=1C5CHFA_enGB918GB918&sxsrf=ALeKk00aDhKAUWNVEI-yfevSEhFJaZsjhQ:1615742981156&source=lnms&tbm=isch&biw=1440&bih=700#imgrc=1A1EGFWQIkrmzM
[5] https://www.startupdonut.co.uk/financing-a-business/10-options-for-funding-your-small-business
[6] https://www.forafinancial.com/blog/working-capital/pros-cons-private-investors/
[7] https://www.moneydonut.co.uk/tax/research-and-development-tax-relief/research-and-development-grants
[8] https://smallbusiness.chron.com/advantages-amp-disadvantages-bank-loans-47377.html
