It is a sad fact of life that most small businesses require capital to start up. There are a few businesses which require only the minimum of equipment and stationery (journalism, PR and teaching, for instance), but most will require some form of outlay either for equipment, for stock or both. Then there are other considerations. You may need a budget for advertising, for accountancy and legal fees, or even for adapting your living room.
Before you even try to raise money, it is well worth thinking about the minimum amount needed. If the business is in the fledgling stage, try to keep only to the bare essentials — there will be time for a mahogany desk and state-of-the-art printer at a later, more successful stage.
Once you’ve worked out what you need, the next item on the agenda is how you are going to raise it. Here are some ideas:
Your own savings
Using your own savings is an excellent way to start a business, as it doesn’t mean incurring debt or risking other people’s money. However, it is normally only an option if you have planned the business for some time. Jennie Woodcock, who owns Bumper Jeans, a children’s jeans company, always knew that she would one day be self-employed, ‘ so I had something put aside for when I needed it.’ She started her company largely on her savings.
Sell, Sell, Sell
Selling certain of your possessions is another good way to raise money. You might decide to trade in your expensive car and buy a cheaper one, sell an heirloom or even furniture. It is also possible to trade in certain life assurance policies, provided they are of sufficient value. Louise Morrey, whose hand-painted goods are sold by the National Trust, raised initial funds this way.
Family and Friends
Family and friends can be an excellent source of capital — or an unending source of grief The key is to establish what they expect for the money they are giving you. Do they regard it as similar to a charitable donation and expect no return, other than your success ? Or are they throwing their long-cherished savings into the venture in the expectation that you have a product which will make them rich ? Before you accept their money, make sure you both understand :
- whether it is a gift or a loan
- whether it is to be repaid without interest or not
- whether your family (or friends) expect to have a stake in the business - or even shares - in return for their money - or whether they are trusting you to go it alone.
If the arrangement is a business one, i.e. they expect some form of return for their investment, or you are selling them shares in the business, then it is vital that you see a solicitor and put the arrangement on a business footing, so there is no misunderstanding. Hell hath no fury like a family at war with itself over money, as Peter (not his real name) knows. ‘My cousin lent me £5,000 to set up a mail order business. I thought of it as a long-term loan. He didn’t. He called the money in just when I needed it to really get the business off the ground and we had a real row about it. We haven’t spoken since.’
That doesn’t mean that borrowing from friends and family is doomed to failure. Sally Wilkins started her baby-sling business on the back of a £100 family loan for materials - and now has a turnover of £250,000. It is just that you should all know the score before you begin.
Raising money by selling shares - or a stake - in the venture
Venture capital generally means that an outside party invests in your business, in return for a stake in it, although you are more likely to find a buyer for an established business than for a highly speculative one. Nevertheless, there are exceptions. ‘Angels’ often invest in theatre productions where there is no cast-iron guarantee of success. Based on this idea, there are now business angels who will invest in start-up businesses. Contact them through the British Venture Capital Association. Your TEC may also be able to give you a list of local firms which act as introduction agencies for small businesses and potential investors. Two schemes to look out for are LINC (Local Investment Networking Company) and EIS (Enterprise Investment Scheme). Another way of raising money is share buy-back schemes where you sell shares, but agree to buy them back at a later date. You can get more details through an accountant.
If you are interested in selling shares in your business, it is vital to consult an accountant and a lawyer. It is also worth reading the Department of Trade and Industry’s free brochure Finance without Debt, A Guide to Sources of Venture Capital under £250,000.
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