The process of turning your business idea into a reality is an extremely exciting one. Of course, the idea itself is hugely important. You need to think of something that solves a problem or adds value to consumers but, more than that, it has to be something your prospective customers are willing to pay for.
Once these fundamentals are in place, it’s then time to think about how, practically speaking, you can get your business off the ground. There are some businesses that can be started on a shoestring, with a minimal initial outlay or capital requirements. However, most businesses will need some external funding.
An overdraft is a credit facility agreed with a bank to cover your short-term finance needs. The banks have been reducing or removing business overdrafts in the last few years, but that doesn’t mean you won’t be able to access an overdraft to pay bills, buy stock and help to regulate your cash-flow. An overdraft can be an expensive way to borrow money, and it should not be used as a long-term funding option. The banks can also reduce or withdraw an overdraft at any time.
When you apply for a small business loan lenders can be very rigorous about the application process. They are likely to ask a lot of questions about the numbers and your projections, but also about your personal finances, so make sure you prepare properly and have all the information to hand. The amount you pay for a business loan will be determined by the source of the loan, the term of the loan and whether it is secured against business assets.
Equity finance is the sale of a proportion of your company in return for the funds you need. For example, an investor may provide £5,000 of capital in return for a 20 per cent stake in your company. You can seek equity funding at different stages of your business. If you’re in the process of setting up your business, seed funding or early-stage funding could provide the capital you need.
Crowdfunding has become an increasingly popular way to raise seed finance, making up 32 per cent of these early-stage financing rounds in the first half of last year. Crowdfunding gives businesses the opportunity to pitch their ideas, products or services to the public. Consumers can then pledge funds to support the company in its early stages. In return for their support, they either receive perks once the business starts operating, or equity in the company.
Accelerator programmes are a different prospect altogether. While some programmes offer funding, many businesses benefit from free workspace and mentorship while taking part in an intensive programme that helps entrepreneurs launch their businesses. This will often culminate in a ‘demo day’, where start-ups pitch to investors for funding.