A start-up business faces some particular problems in raising finance when compared with an already established business, in that as the business does not yet exist or is in its very early stages it does not have the following. They also tend to have a requirement to invest cash in the early stages of setting up; arranging premises, hiring staff and taking products or services to market, before they can hope to start to see some cash coming back through achieving sales.

There is an American phrase ‘burn rate’, which describes the speed at which a business uses up its available cash. These characteristics mean that while start-ups tend to use the same types of sources of finance as more established businesses, as covered in Section B, these tend to be in a different order of priority which runs thus. It should be stressed that each of these areas is covered in more detail in Section B and this chapter therefore simply gives an overview of the issues involved. When you are preparing your business plan and its cashflow forecast, you should at first leave out any injection of finance as the important thing to start with is to establish how much is required. Only once you have a view on this, should you then start to think about how you’re going to fund it.

One tip, however, is that while lenders will always be looking for you to put in as much of your own cash as possible, both to demonstrate your commitment to the business and to reduce the amount of money you need to borrow from them (and therefore their risk), you should always try to keep something in reserve. This is because if your business ever gets into difficulty, in extremis you may decide to pay in these reserve funds to see you through, where a third-party funder such as a bank, which doesn’t have such an emotional stake in the outcome or a financial incentive in terms of the value of the business, may not want to advance additional funds.

You As The Business Owner

Many businesses are funded in the first instance by the owner’s own cash.

The advantage of this approach is that if you are providing all of the equity funding, you will retain full control and ownership of your business. The disadvantages can be that:

• you may not have sufficient resources to fund the business properly to the level required; and that
• your personal assets (and personal financial health) are now mortgaged to the success of the business.

Nevertheless for many new businesses, raising your own money to go into the business may be the only approach available and this will involve:

• using your savings;
• selling off assets to raise cash;
• raising personal loans or borrowing on credit cards; or
• if you’re a homeowner, borrowing against the equity in your property.

While you will obviously not have to prepare a pitch in order to sell yourself the idea of investing in your business in the way that you will have to if you are seeking money from other people, it is still always a good idea to prepare a formal business plan. This should always include a cashflow forecast (see Chapter 4) to help you think through how much money the business is going to need and where you’re going to raise this from.

There is an old saying in the insolvency profession to the effect that there is no point putting enough fuel in the plane to fly halfway across the Atlantic. If by preparing a business plan including a cashflow, it becomes obvious that you cannot arrange sufficient funds from your own and the business’s resources to make it through to a sustainable trading position, then you need either to find another investor at the outset, or rethink or abandon your existing plans.

In practice, many small business owners start off by funding much of the business’s initial expenditure from their own resources, bearing expenses like rent, stationery or advertising from their own funds because until the business has achieved a successful level of trading, it simply doesn’t have the funds to do so. Once the business is up and running the owner then has the choice as to whether these expenses should be repaid, or the cash left in the business by way of a director’s loan, or treated as an equity investment. This is something that you might want to talk to your accountant about as it may have an impact on your tax position.