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The New Entrepreneur: Raising Funds for your Venture

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In this post, I’d like to summarise the various ways you can go about raising money for your business idea. There are a number of ways to do this, none of which involve having to sell a kidney.

If your savings and borrowings from friends and family will not cover the setup costs of your business, it is highly probable that you will have to approach commercial lenders to help finance your business venture. All of them will want to know the details of your venture, hence your well-written business plan, covered in yesterday’s post. Nevertheless, it is best to know what sort of finance is available, and what this might mean for you.

Generally, your first port of call when looking for finance will be a bank, especially if your funding needs aren’t wildly extravagant. There are a number of services a bank could offer, and you need to decide which of these is best suited to your needs.

Overdrafts
Whatever your funding requirements, your business is going to need a current account to deal with day-to-day payments and receipts. With the bank’s agreement, an overdraft can be a simple way to cover any short-term funding needs. Terms vary, but a number of banks do offer special terms and incentives for businesses that are just starting out.

Business Loans
In addition to overdrafts, banks also offer loans to businesses who need to cover a large payment, such as buying machinery or expanding their premises. Once again, terms vary, but repayment periods can be anything from 1 to 25 years, at fixed or variable interest rates. Banks will generally need to examine your cash flow forecasts in order to ascertain that you will be able to cover the costs of your borrowing, so it is important to ensure that you have made your costings as realistic and accurate as possible.

Private Finance
If the banks are unable to offer you a funding solution, don’t give up hope. There are other options available to budding entrepreneurs, from private individual investors to venture captial organisations. These tend to be lower in profile than banks, however, so you will need to do some sniffing around before deciding on who to approach. This can be a long and arduous process, as can many things about starting a business, but if your idea if worth it, you will persevere.

When contacting investors about funding your venture, it is best not to bombard them with the entirety of your business plan in the first instance. See if you can have an initial conversation with them first to discuss your business idea. If they are interested, you can follow up with a copy of your executive summary. If they want more detail, then you can present your business plan, complete with any supplementary details they have asked for. Just as with banks, it is best to see if you can get more than one offer of investment, so that you can accept the terms that are best suited to your business and that you are comfortable with.

Any investor worth their salt (and equity) will demand due diligence before handing over a cheque. This involves examining all the details that you have told the investor about your business idea and ensuring that everything is in order. While investment funds tend to have formal processes for carrying out this process, private individuals or business angels may be more casual. Regardless, this is why your business plan needs to be entirely truthful and realistic. It may be tempting to sugar-coat a forecast, or to be wildly optimisitc about trading conditions, but it’s not worth the risk of losing funding when you have an agreement in principle. Also bear in mind that it is you who will be bearing the costs of the due diligence process, so the better prepared you are, the less that will need to be done, and the lower the final cost to your business.

Finally, when negotiating the terms of an agreement, it is important to remember that while you’re a startup, your investor has considerable more experience in these matters. For that reason, it is a good idea to have a trusted advisor to make sure that you push for the best possible deal. As with all negotiations, you need to be fairly flexible, but you also need to remember that the terms you settle on will have a bearing on not only your profits from your business, but also on any agreements you may enter into in the future should you require additional funding.

In the next post, I will go into more detail about the types of funding available and the effects they can have on a new business.

[Image by KM & G-Morris]

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