“Start Up” is an evocative word, which usually suggests San Francisco style tech companies with an electric scooter and a coffee obsession.
However, the pandemic saw a dramatic increase in the number of new businesses being launched, as individuals started to take up a side hustle or monetise a long-held passion. Some of these have since developed into small yet successful businesses.
Both the tech entrepreneur and the person packing boxes of cup cakes at their kitchen table, have at least one thing in common, and that is that they need funding to fuel growth.
If you are looking to get to that next stage of growth, whatever that may look like, here are some tips to help you get there:
1. Do your research.
A lot of small business owners get the cart before the horse when it comes to planning, as they wait for success before starting to do any business planning. We encourage all our clients to pull together a one-page business plan, which helps them plot where they are now, where they want to be, as well as their first steps in how to close the gap between the two.
Research into pricing and costing is also crucial, so you are confident at what levels you become profitable. These can all be addressed in a basic budget or forecast.
Getting an insight into your customer is crucial, as by understanding who your customer is, and what attracts them to your sector, you can start to target them specifically.
All good accountants should be able to help pull together a business plan, a budget and facilitate a customer persona workshop.
2. Use what you got
A lot of start-ups begin by their owners “bootstrapping”, when they fund the business through savings, personal loans or by re-mortgaging their house, depending on the risk appetite and speed they want to grow at.
The benefit of this, is that you don’t have additional costs of external funding, such as arrangement fees or interest, nor the worry of covering a monthly repayment
The issue being that you are exposing yourself to all the risk of a venture. Fair enough if you just limiting your capital injection to what you can afford, but if you do take out personal finance, that still needs to be paid regardless of the success of the business, which could leave you financially exposed.
3. Use your contacts and networks
Everyone has a support network, be it through family and friends or professional colleagues and contacts. When money is tight, this is when you tend to rely on them most.
A close family member or friend may want to invest in you or provide you with a small loan to help you get started. This is preferable than through a bank if your relationship can survive the worst-case scenario. Therefore a business plan is so important to have to hand.
Similarly, using friends or colleagues’ expertise is much cheaper than their professional counterparts. Taking a friend out for coffee to pick their brains on an area they specialise in, is much cost effective than getting professional advice.
4. External Funding
This can take many forms, such as a traditional business loan, crowdfunding, angel investment or funding from private equity and venture capitalist. All of these have a place for start-ups depending on their sector and where they are in their journey. However, the bank loan maybe the most universal solution for all size of start-up.
There are specific business start-up loans which are backed by the British Business Bank, which enable Start-Ups to borrow up to £25,000 over 5 years at a fixed rate of 6% per annum. These do require a personal guarantee from the owners, so would still need to be paid back even if the business folded. This means that you really need to think about how much you need to borrow and the cashflow implications of the business and of you personally. It is also important to note, that you need to present a business case to justify the funding. Hence the need for a business plan and financial projections and budgets. However, when it is all approved and signed off, it provides a useful source of capital for an owner.
Financing has become sophisticated, with financial institutions offering businesses more than just term loans and overdraft facilities. Your business may lend itself to a different financial product, like invoice discounting and factoring or asset financing. Again, your accountant should be able to take you through the differences and the benefits of each.
These other methods of funding may be more applicable to the more established start-ups. However, it is worth running through what they are:
Crowdfunding, when you seek funding from supporters who in turn get a small state in the business as well as perks and benefits associated with your business.
Angel Investors are established businesspeople who provide financial backing to companies that they see potential in, with the hope they can also reap the financial rewards of any success.
Private Equity firms and Venture Capitalist are investing institutions who look to invest more significant amounts of capital into a start-up, generally taking a larger stake of the shares, with the hope of recouping their cash through the growth of the company, be it via dividends or the sale of their percentage further down the line.
There is a lot to consider when setting up a business; from business strategy and financial projections to market research. The good news is that there isn’t one right way of doing things and you can go at your own pace. The other bit of good news is there is plenty of expertise that you can draw on to help you make a success of your new venture.
The most important investment you can make is in a good accountant or business advisor, who can guide you through the confusing process.