Start-ups – what are your options for finance?

As we know, starting a business, certainly for the first time, carries many risks, particularly if you have no prior experience of managing a business. According to the Office for National Statistics [ONS] only 40% of newly formed companies and businesses are still trading after 5 years. In fact, the ONS also reports that in some sectors failures can be as high as 90% within the first year!!

The four most common reasons for new businesses to fail are:

  • Lack of business planning
  • Poor management
  • Insufficient working capital
  • Blowing marketing budgets

There is no doubt that raising finance for new start businesses can be the most challenging time to raise funding. It is also true that ‘insufficient investment and/or working capital finance’ is a key factor in many start-up failures. It is a sad reality that many new start-up businesses are destined to fail for this reason, but that many could avoid failure if they had only sought help in raising the funding they needed. In a recent survey conducted by Ipsos Mori, on behalf of the British Business Bank, one of the key findings was that ‘The lack of awareness of the true range of finance options available was a major limiting factor in the development of early-stage businesses’.

Recent years have seen a significant increase in the number of funders looking to support SME’s; so much so that even professional commercial finance brokers have difficulty keeping abreast of the options now available. It is no surprise therefore that if they are challenged to keep abreast of the finance options, it presents even greater challenges for those setting up businesses for the first time who often have little, if any, knowledge when it comes to accessing finance.

In plain and simple terms the standard sources of finance for startups (whilst not in absolutely strict chronological order, but close to it) are:

  • The founders own resources. This may be, for example, savings, mortgaging of a property or it may be by what is often referred to as “sweat equity” i.e. time spent in and on the business.
  • Then comes friends and family (there is another but we will skip over that!). Whilst this is often a source of readily available finance at low cost it should be remembered that not all new businesses become roaring successes. Indeed, many fail. In these circumstances this can lead to severe ‘internal’ friction.
  • Next comes the possibility of raising seed capital, normally through a business angel investor. These are usually high net worth (HNW) individuals prepared to fund the early stages of projects that they find interesting but which they are prepared to take a risk on. In return for this investment they will normally be seeking a significant equity stake and possibly additional security. They can often offer one additional benefit, however. That is that I addition to providing the finance, they will bring considerable business knowledge and experience to the table.
  • Once a new start business has gone through these funding stages, there is a reasonable chance that it will be able to demonstrate a steady growth pattern. It is at this stage that the more conventional finance sources start to become available. By this we mean the banks, invoice and trade finance and asset finance companies. It is at this point that a good commercial finance broker will help to sort ‘the wheat from the chaff’.
  • Moving on from this, one then moves into the realms of venture capitalists and the like, but then one is most definitely not talking about start-ups!

Bearing in mind the importance of having the right finance, when put together with the sheer number of finance options available today, there are two essential requirements for a new start business when it comes to advice. These are:

  • A good accountant. By this we mean one who not only does your end of year figures, and possibly your VAT, but one who takes the time to learn about and understand your business. A good accountant will help you to carry out serious and accurate forward planning, essential in showing you just how much finance you may need to raise to make a real success of the business.
  • Secondly is a knowledgeable commercial finance broker. One who knows not only a great deal about the various forms of commercial finance, both ‘traditional’ and new forms, but also knows which are the most reliable providers of such finance. They will also be able to advise not only on who provides the best deal in the current circumstances, but also what type of finance (or combinations of types) suits your business’s circumstances and needs at any particular time.

In 2019, according to Gov.UK, there were 672,890 new companies registered in the UK with Companies House. This was the highest number since 2009. In 2020 there were 753003 and the figure looks as though it will continue at this level in 2021 as there were 388240 registered by the end of June.

Peter Douglas
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Peter Douglas

Peter was one of the original Founders of BFS. Having successfully completed a Degree in Business Studies he spent over 20 years in Export Sales and Marketing. He then decided to give up the globetrotting life and, with his wife, bought a small business which they ran together. Peter has been involved in running SME’s ever since and set up BFS in 2002 having spent time getting an education in commercial finance. He says "Whilst it is hard work I have never had so much fun as running BFS. Nothing gives more satisfaction than helping SME’s to grow or regain their strength".