Raising start up capital can be one of the most daunting tasks on the list when you’re starting a new business.
About start up capital
While start up capital can be found using personal finance alone, bootstrapping your business (funding start up from your own money only) may not be possible. You’ll need to take a very realistic view of how much you need to live while your business is being set up, as well as the amount you’ll need for premises, fixtures and fittings and employees, which are generally quite costly. For many businesses much more start up capital is needed and as an entrepreneur, you’ll need to look further afield.
As a start up capital can be harder to come by. Without the facts and figures, profit and loss, and general information that attract traditional investors you could find yourself remortgaging your home, selling much loved possessions or asking friends and family for financial help.
Making a plan
Wherever you’re looking to raise your start up capital you’ll need to have a solid business plan to back up your idea. This will help you to define the assets you’ll need in place to get started as well as the amount you’ll need to finance your first months of business. It will also help you to have all the information you need to hand if you’re presenting to potential investors.
For some it can be worth raising a smaller amount using personal finance and funding from friends and family, allowing a few months (or even a few years) of trading while you register your business and get the ball rolling.
Finding customers, getting some orders on the books and showing that your business idea really is viable will take you to the next stage. Then, investors will sit up and take notice because they can see the potential ahead of you.
How much?
It’s worth being wary of underestimating the amount you need to start your business as the chances of success are much slimmer if you don’t have enough money in the bank to get you there.
Your start up capital should, at the very least, cover:
- Cost of premises – leasehold or freehold plus expenses.
- Fixtures and fittings, plus equipment and furniture.
- First phase operating costs – this is likely to be at least six months’ worth and should include all salaries, including your own.
As your business begins to take shape your estimates are likely to need bolstering – probably by at least 50%.
Investing your time in investors
When looking to raise start up capital there are a number of options open to you and you need to decide whether you wish to raise the money via debt or through equity.
Debt is the most common way to gain start up capital for new businesses and is secured using the assets of your new company. It’s popular because your lenders are solely interested in the market value of the items that they’ve lent against, not your business itself, allowing you to retain 100% ownership.
Equity offers investors a proportion of your business in return for their money. Using this route your negotiation skills will be tested as, while you’ll be keen to give as little of your business away for as much capital as you can gain, the investors will be looking to achieve a bigger percentage of your business for less.
When dealing with equity investors, from angels and venture capitalists through to crowd funding, you’ll need to consider:
- How much capital you need from them – you could choose to have one investor to inject the funds you need or you could choose to have a number of different investors.
- When you need the investment – you may agree on a specific sum to start with and regular injections at agreed dates or milestones.
- Return on investment – how much of a share will the investor get and when? Your investor will also be calculating the risk involved based on timescales and reliability of your figures and plans.
- Decision making – you’ll need to agree ahead on whether your investors can intervene in major business decisions and what those decision may be.
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