Most businesses require some level of funding when they set up and securing the right amount from the most appropriate source and using it to the best effect is crucial to the long-term success or failure of the business.

Different businesses will have differing funding requirements: one business may be entirely financed by the owner's personal assets whereas another may need the help of a large loan to pay for stocks. Many firms secure their funding from a variety of different sources where others will rely upon a single source.


The type of funding that you are seeking will be influenced by a wide variety of factors:

 

  • How much money you need
  • The level of risk involved in the investment
  • What you plan to spend the money on
  • How much equity is in the business?
  • The state of the market you are operating in
  • The level of risk involved in the investment
  • The industry you are operating in
  • The type of business you are setting up
  • The proportion of the business you need to own
  • Your past business performance
  • Your ambitions for the business 

In general, funding sources fall into three main categories: equity, debts and grants.

Equity

Equity, or capital, refers to money that has been invested in a business by private individuals in exchange for a stake in the company.  This is usually represented by shares or a percentage of ownership. There are both benefits and drawbacks to funding your business through private equity.  On the upside investors may be more flexible and sympathetic to the progress of the venture and on the downside you may lose some degree of control and the investor is entitled to his share of your business and its profits.

Debts

Many small businesses borrow money from their banks or other lenders to fund part of their start up costs. These lenders have their own individual lending criteria but what they do have in common is that they all avoid exposing themselves to a high level of risk and will be interested in how much equity will be put into the business. They will also need to be satisfied that the business plan is realistic and you will also probably be required to put up security, such as property or a personal guarantee against the loan or overdraft.

Leasing, hire-purchase and invoice discounting/factoring (selling the debt to a third party who will chase the debt for you) are other ways to raise money through using the firm's assets. 

Grants

Grants vary from area to area and from business to business but there is a huge range of schemes and programmes that you may qualify for. Grants are available from many sources (Government, charities, trusts, EC etc) and many are specifically targeted at businesses that are about to start up.

There is a variety of sources for funding the start up of a small business including, bank loans, business angels, personal equity, credit and charge cards, friends and family, through hire purchase, mortgages for premises, overdrafts and venture capital.

 

What ever way you chose to finance your venture always remember to thoroughly research all of your options and to document every financial transaction.