How can you finance a new business?

Financing a new venture is a challenge, even harder in the current climate of high inflation, global uncertainty and the backdrop of war in Europe.

Difficult, but not impossible. With planning, careful research and the right advice, you should be able to find the finance that is right for you.

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

Peer-to-peer, crowdfunding, angel investors and other forms of alternative funding can be more flexible and may not require the extensive credit history of a bank loan.

However, with all forms of finance some pitfalls are best avoided:

Lack of preparation

In some ways persuading a financial institution or financier to lend you money for a business is a bit like getting a mortgage.

They will want to see that you can afford the loan or support being offered and have a clear plan for repayments and the initial equity to kick start the company.

They may take the view that if you are not prepared to invest in yourself, then why should they?

For most loans you will need to provide some collateral, should there be a default in payment, but lenders will also want to see a clear business plan and some indication of income to support regular repayments and interest.

Planning is the key

You know what they say, failure to prepare is preparing for failure.

As mentioned, you must have a business plan. Unfortunately, many start-ups apply for finance with an underprepared or even non-existent 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

Equity investments can come from friends and family, angel investors online or even crowdfunding platforms.

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.

This can free up additional funds needed early on within a business but can create conflict, especially where investors are friends and family.

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

A loan can be short-term or long-term. Whatever the loan’s terms, however, you must pay the money back within a set time frame, plus any interest.

If you are not sure which option is best for you, speak to a professional adviser beforehand.

Know your borrowing limits

It seems obvious, but you should not borrow too much (or too little).

You should 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, just 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.

A lender may take the view that if a business owner hasn’t taken care in managing their personal credit, there is the potential that they will take the same approach to their business credit.

Because of that, managing your personal credit is critical and starts with knowing your current score and creating a plan to improve it if necessary.

If you are looking to start up or scale up a business then you must seek professional advice on financing beforehand.