An introduction to start-up finance
Starting a business is an exciting yet overwhelming time. It is a period often filled with an abundance of ideas and inspiration, but with challenges and risks too. Financing a start-up in the first few months or even years can prove difficult. In fact, according to research carried out by Start Up Loans, 40 per cent of participants cited funding as the main barrier to starting a new business. However, financing your new business idea needn’t be a daunting prospect as there are a number of ways to access a much-needed cash injection. As financial services experts, Complete Commercial Finance can support you, whether you are just getting started or are several months into running your business.
What are the options?
Every start-up is different, and so are each business’ costs, accounts and financial needs. The company’s goals and requirements determine which funding support might be considered best, and a broker can advise and guide decisions which may impact finances for several months or years ahead.
Asset finance, invoice discounting, merchant cash advances and cashflow funding all offer potential ways for start-up business owners to finance their launch and initial period of trading. There is a common misconception among many start-up businesses that taking on a loan at the outset is something to be avoided, yet lending can enable a much-needed investment in equipment, transport or tools which a business requires to operate, or help create a consistent cashflow while allowing a company to cover monthly costs and establish a reserve.
Government funding is also available for some start-ups; applying to NWES can provide a loan of up to £25,000. Whether you are currently looking to purchase new machinery, want to run an advertising campaign ahead of Christmas or are planning for expansion in 2023 or beyond, these funding methods may be an option for you.
Asset finance for start-up businesses
Asset finance offers excellent support when you are starting out in business. This alternative to a traditional bank loan or overdraft is a helpful way to secure funding for the purchase of equipment, machinery or vehicles. Asset finance gives you the ability to acquire an asset immediately without having to make a full initial payment, making it particularly useful at the very start of your business or if you are looking to grow your team and therefore require extra equipment. A loan can help to fund business critical assets such as a builder’s van or photographer’s equipment, and lenders will usually fund this type of application on an item which holds its value.
Hire purchase asset finance works similarly to a mortgage. Following the business owner paying a deposit, a lender will own the asset for the length of the agreement (usually between two and seven years). The business will repay the balance of the cost, plus interest, with regular, fixed payments. At the end of this, the business will then own the item outright. This type of lending is particularly useful as it is a fixed agreement with a regular payment schedule which allows you to confidently factor the cost into a monthly or annual budget and any future plans.
Invoice discounting for start-up businesses
Invoice discounting is a highly flexible and useful type of lending for many types of small businesses. It enables business owners to sell their unpaid invoices to release money back into their business, therefore offering a potentially ongoing supply of funding (assuming the business continues to generate invoices). Invoice discounting is particularly helpful for businesses with slow payees who typically take longer than 30 days to pay invoices. It keeps cash coming in, enabling you to pay staff and suppliers as required.
One benefit of invoice discounting is that it can grow with your business. As you scale up, it is likely that the volume and value of invoicing you issue will increase. This, therefore, will enable you to borrow more each time, allowing for further expansion. Once an agreement is finalised with a lender, funds can be provided quickly – it often takes just 24 hours. Furthermore, once in place, invoice discounting does not require re-negotiation; the facility can be used again and again, whenever your invoices are issued.
Merchant cash advance for start-up businesses
Merchant cash advances are a great way to quickly raise funds for businesses which regularly take card payments, such as shops, hairdressers and mobile services. Typically, loans range between £5,000 and £300,000, and can usually be arranged within 24 hours. This type of finance solution can be used by any business which has been trading for at least six months and which takes payments via a card terminal.
A merchant cash advance provides a lump sum payment which is repaid through a small percentage of every card payment received. A business owner might want to take a cash advance to pay for a refit of its premises or an advertising campaign, for example. As they reap the rewards of improvements or marketing activity and see more customers spending with them, a percentage of each payment received is directly paid to the lender each working day.
With a merchant cash advance, the amount of money you repay to the lender will vary on how successful or slow your sales are at different times of the year. In particular, this can work well for leisure and tourism businesses which experience seasonal peaks and troughs: a merchant cash advance could tide you over through the quieter months, and the debt is only repaid during your busier, more profitable period.
Plan, plan and plan some more…
Running a successful business relies on planning. Whether it’s knowing how long a job takes to give a quote and manage your working week, recruiting and utilising staff as your company grows and during peaks of activity, or planning when you can take a well-earned break!
Similarly, having a clear idea of how you anticipate the coming months, year or even five years will see your business grow can allow you to make the best choices with regard to financial decisions. Knowing your industry and how it operates, and gaining an understanding of the funding solutions available to you, will allow you to make the best decision when faced with a hefty outlay or a quieter trading period. Staying informed and making optimistic, but realistic forecasts can help you to choose the source of funding which is best for your start-up business.
That is where an independent business finance broker can help. As a team, they will guide you towards the best financial solution for your business at the right time. Building a long-term relationship with a broker will ensure they understand your goals and can help you to scale up at the appropriate time and while using the best finance for your company.
Over the long-term, a broker can help to move your business around the ‘money market’, ensuring you have access to the best deals and types of commercial finance for your sector – for example, as your company builds a business credit score over several years, cheaper types of lending may be available to you.
Regular contact with your broker will ensure you take advantage of their knowledge of funding options and the latest deals on offer, saving you time and gaining insight into options you may never have otherwise considered – think of it as your outsourced financial adviser. With regular cashflow and more opportunity to retain and grow a cash reserve, your business has the potential to get off the starting blocks and deliver a strong performance.
