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IntroductionEvery new business needs money when starting up. The

majority of businesses will need to buy equipment, establish the workplace and meet marketing costs - all before the first sale is made. Once you're trading, you'll need cash to pay the bills and keep the business going.

There are a range of financing options when starting up and choosing the right ones for your business needs is essential. You might be able to use your own money, or you may need money from an external source or investor - eg from banks, family and friends or outside investors. You may also be eligible for grants and government support.

IntroductionMost businesses use a combination of these

alternatives, according to their specific needs and circumstances.

This guide will help you to work out how much money you need for setting up your business, the various financing options available for your business and their advantages and disadvantages.

Work out your financial requirements when starting upWhen starting a business, you need to prepare a

business plan. This should set out how you intend to operate your business and should include essential financial forecasts. These forecasts will help you determine how much funding your business requires, what it is needed for and when you will need it by.

Good planning will also make it easier to raise the money you need by showing potential investors that you know what you are doing and that it is worth investing in your business.

How much finance do you need - and when?It's essential to have an accurate idea of your

financial needs. Once you have calculated the amount you'll need to cover your initial start-up costs, you'll also need to factor in your running expenses. You should also remember that customers may not pay you immediately - but you will still need to pay all your bills to keep trading. It's sensible to have sufficient capital to cover projected expenses for at least six months.

How much finance do you need - and when?It's essential to have an accurate idea of your

financial needs. Once you have calculated the amount you'll need to cover your initial start-up costs, you'll also need to factor in your running expenses. You should also remember that customers may not pay you immediately - but you will still need to pay all your bills to keep trading. It's sensible to have sufficient capital to cover projected expenses for at least six months.

Finance options for new businessesUse your own savings or personal borrowings

to fund the business, particularly if you can't obtain finance or investment from external sources

Borrow money from family or friends. However you should carefully consider the risk that they could lose their money if your business fails

Finance options for new businessesBorrow from a bank if you have a credible

business plan and can offer some security. Many businesses use overdrafts for day-to-day borrowing and to manage cashflow, and loans for long-term funding, or to finance large purchases such as equipment. If your business is likely to have peaks and troughs in its cashflow, it's essential to be able to clearly illustrate these to your bank so you can plan an overdraft. When considering bank finance, it is generally a good idea to take professional advice from your accountant or business adviser.

Finance options for new businessesQualify for a grant or government support.

These can provide very cheap financing, and often come with business advice or subsidised consultancy. However, there is usually a lot of competition for grant schemes, and you will need to meet various criteria - depending on the scheme.

Finance options for new businessesIf you are finding it difficult to obtain bank

finance, you could also consider commercial lenders - such as insurance companies and building societies. You may get a better deal - eg lower interest rates - and they are generally less restrictive - eg if you have a poor credit rating. However, commercial lenders are also subject to fewer regulations than banks and you may have to provide some security in order to obtain funding.

Finance options for new businessesLook for finance from other areas - eg from a

community development finance institution - if your business only needs a small amount of funding, or if you are setting up in a deprived area, or in a sector not normally covered by banks or other lenders.

Most businesses use a mixture of finance sources. For example, you might invest your own money to cover market research, bring in outside investors to share the risk and borrow from the bank to purchase equipment and machinery.

Use your own money to set up your businessIf you're starting a new business, it's likely that

you'll have to put up at least some of the money yourself. In fact, it's usually difficult to borrow from a bank or attract other investors unless you're also investing some of your own money.

The easiest and most cost-effective way to provide your own financing for a new business is to use your own savings. However, this can be risky, and you may not have enough to cover all the funding you need. You could also consider

Use your own money to set up your business

Getting a mortgage - or a second mortgageBorrowing privatelyGetting an unsecured loan, or borrowing on credit

cardsSelling possessions or assets

You should always think carefully before borrowing any amount of money and should always aim to match the financing to your needs. For example, using credit cards for long-term expenditure can be very expensive, while some loans can be inflexible - you could end up paying interest over many years.

Use your own money to set up your businessIts also important not to over-extend yourself. If you

borrow too much, you may not have enough money left over to cover your living costs while the business gets going. You should also try to leave a contingency fund, in case you need extra money to see you through a difficult period.

Self-financing your business gives you far more control than other finance options. It also means that you don't need to pay back or rely on outside investors or lenders, who could decide to withdraw their support at any time.

Use your own money to set up your businessHowever, you must be aware of the risks of

financing a new business yourself. For example if your business were to fail, you could lose your home and other personal possessions. And just knowing how much you have borrowed can put a lot of pressure on you and your family.

It's always a good idea to take professional advice before making a final decision on financing.

Other sources of financeIf you are finding it difficult to obtain finance from the

normal sources, there are more options to consider:community development finance institutions (CDFIs)

- can provide finance to businesses who only need a small amount of funding and who can't obtain it from banks or other lenders

peer group lenders - are organisations that specialise in providing funding and business support to business owners of a particular age or background, or for businesses of a certain size or type

as a new business, you may be eligible for tax breaks - eg lower tax or National Insurance contributions rates

CDFIsCDFIs are sustainable, independent

organisations established to develop and create wealth in disadvantaged communities or markets. They provide capital and support to individuals, micro enterprises and small businesses.

A loan from a CDFI can be used to purchase equipment or property, to finance working or start-up capital or to fund marketing campaigns. Loans can be for as little as £50 or up to £1 million depending on the project.

Peer Group LendersSome businesses find that they can access

finance, support and advice from other businesses in their peer group - known as peer-group lenders. There are many organisations that have been set up to support specific groups of individuals and businesses.

Peer Group LendersProwess - the UK association of businesses and

individuals that specifically support women in business.

The Asian Business Development Network (ABDN) Ethnic Minority Enterprise Network - assists Asian and minority businesses by creating access to opportunities and sharing best practice.

The Black Business Initiative (BBI) - aims to support the black and minority business community.

Tax advantages for new businessesAs a new business, you may also be eligible

for tax allowances and reliefs

New businesses may also be able to benefit from the government's Regional Employer NICs holiday scheme. This may entitle you to a reduction in your NICs.

FormalitiesAll the information provided is for informational purposes

only and you should seek specialist personalised advice as required. As such, we accept no liability for the actions taken by the readers of this slideshow.

All information was provided by Business Link and is covered by Crown Copyright.

All information is available as shown below: BusinessLink (2012) Choose the right finance when starting up. Available

at: http://www.businesslink.gov.uk/bdotg/action/layer?r.i=1081921831&r.l1=1073858790&r.l2=1084705429&r.l3=1087443481&r.l4=1076795303&r.s=sc&r.t=CASE%20STUDIES&topicId=1076795303 [Accessed: 6th August 2012]

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