How to raise money to start or buy a business

Money expert Gary Hemming from ABC Finance with some top tips on what to do if you want to launch your own project and need cash.

raising money to start business

 

Flexible working that fits around your home and family life isn’t always easy to come by. With this in mind, many working dads choose to become their own boss, by either starting or buying a business.

This can seem like a pipe dream for the thousands who don’t have a giant pot of savings to fall back on, but in this article, we will break down exactly how it can be done, the benefits of using finance when going into business and exactly what you need to supply to qualify for funding.

What are the benefits of using finance when going into business?

The most obvious benefit is that using a loan to get into business is that it allows you to afford a business that would otherwise be out of reach. That said, it isn’t the only benefit.

Running a successful business is all about managing cash flow and borrowing money to increase your cash reserves can really help with this. Starting off with cash in the bank can relieve a lot of pressure and allow you to make decisions clearly without worrying about where the next month’s money will come from.

This will lead to better decisions, give you the freedom to invest in marketing tools, stock and equipment that could lead to increased profits further down the line.

What are the finance options available for those buying a business and what will I have to provide?

When buying a business, your lender will focus on several factors. They are:

  • Details of the business that you plan on purchasing
  • The financial performance of the business and whether that is sufficient to cover the loan repayments. This will be checked through the accounts of the business, with the net profit being the key figure
  • Your credit history
  • For secured loans, your lender will want to know your property value and mortgage amount

While the lender will require a set list of documents, there are still ways of influencing things to make sure your application has the best chance of success.

The first step is to dig deep into the accounts. Look beyond the turnover and net profit to understand the real profitability of the business. If the previous owner spent £5,000 on new equipment or other one-off expenses, you may be able to put those costs back into the profit for the purposes of your application. These costs are known as addbacks.

Other common addbacks include costs due to COVID, one-off costs for projects, depreciation and amortisation.

These addbacks can significantly increase the business’ borrowing power and can be the difference between success and failure.

What are my options if I’m starting a business and what will a lender expect to see?

Starting a business represents a very different kind of challenge as there is no previous financial performance for a lender to base their lending decision on. This makes lending to start-up businesses very tricky for all but a few lenders – but worry not as there are some options out there!

The first is actually a government-backed lender who is aptly named Start-Up Loans. They are keen to support budding entrepreneurs, but still have plenty of hoops to jump through. We will cover the best way to do that shortly.

The second option is to take a secured business loan, or secured loan. These loans are only available to homeowners and involve the lender taking a legal charge over your property, usually one that sits alongside, or behind your mortgage.

By offering security to the lender, you’ll find many more lenders who are willing to lend as they are protected should your business fail. This of course means that your property may be at risk, so it’s important that you are fully aware of the risks when taking this route.

Finally, we’ll take a look at what a lender will require and how we can jump through the inevitable hoops when applying for a loan for your start-up business. The main documents are:

  • Business plan – a business plan is a document that breaks down the company’s goals, how it will achieve them and timescales for achieving them. This allows a lender to understand what your business will do and how you will do it.
  • Cash flow forecast – this document breaks down what money you will spend and how much you expect to receive. A strong cash flow forecast will give an insight into the profitability of the company and its ability to repay the loan.

Follow these tips to increase your chances of success:

  • Use a template – this will make it easier to get started compared to starting with a blank page and ensure the format is easy to follow.
  • Take your time – the most important thing is that these documents are detailed and accurate. The more detailed and accurate the documents are, the greater your chances of approval.
  • Be conservative – If you’re hoping to dominate your industry within 6 months, that’s great, but you shouldn’t bet everything on it. If you’re convinced you can do it, produce 3 sets of projections – expected, best case scenario and worst case scenario. Your business should work under each one.

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