Sources of finance for your business

When starting up a business it can be easy to underestimate how much cash you will need to cover your start-up costs and see you through the first few months of trading until the business is generating sufficient cash through trading to cover expenditure.

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Once you have worked out your start-up costs and prepared a business plan and cash-flow forecast you will know exactly how much funding you are going to require. If you don’t have your own funds to invest you will need to consider other sources of finance. This could be equity finance – investment; debt finance – loans/overdrafts; grants.

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Here are a few for you to consider:

Family and Friends

They may well be willing to help lend money to a new business starting up. This can be particularly good if they don’t want any interest repaid on the loan that they make to you. However, your relationship could be strained if you are unable to give them a return on the loan they gave you, so it's wise to ensure that they are fully aware of the risks.

Bank Loans

Most banks offer a selection of finance options for businesses looking to start-up. It's always a good idea to start by speaking to the bank that you have a personal account with to understand what they can offer you, what the interest rate and repayment term will be. It is common for a bank to want to see that you are also putting in some of your own funds into the business.

Government-Backed Schemes

Businesses up to 24 months old can apply for a Government-backed personal Start- Up Loan of up to £25,000. As with all loan applications, you will be credit checked. The loan can be used for most start-up costs but cannot be used for training or debt repayment.

Credit Unions

There are over 500 Credit Unions operating in the UK and many of these offer business loans at low interest rates.

Local Authorities (Councils)

Occasionally Local Authorities may be able to offer financial support to business start-ups, including grants and loans. However, it is worth pointing out that grants are rare and those that are available do have strict eligibility criteria and are often aimed at certain business stages or sectors so may only be able to be used for specific purposes. Contact the Economic Development or Business Services department of your Local Council to see if they have any schemes that might be applicable to you.

Crowd Funding

Crowdfunding has become more widespread and popular and is a way of financing that enables others to invest a small amount of money in a business. If a business is looking for investment it is usually matched with potential investors online via crowdfunding platforms.

Business Angels

Business angels are private investors who want to look at ways of investing their money into new start-up businesses usually in return for shares or a stake in your business. They typically invest between £10,000 and £100,000.

Asset Finance & Leasing

Being able to finance a piece of equipment or a vehicle for your business through regular monthly payments may be an alternative to funding the initial costs outright. This can help you with cash flow at the start and also comes with tax benefits.

Responsible Finance Providers

These types of organisations specialise in lending affordable finance to those who are unable to be supported through mainstream lenders such as banks.

Enterprise Agencies

Enterprise agencies are independent business support organisations which as well as providing business advisory services can often have access to or be able to direct you to local sources of funding. The National Enterprise Network is a network of independent local enterprise agencies in England.

Now you've read the article, here are a few things you could do next...

Thirteen sources of finance for entrepreneurs: make sure you pick the right one!

1. The founders

Explanation: Do you have some savings left yourself? Did you just receive a nice bonus? Why not invest it in your own company! However, you don’t necessarily have to invest in terms of cash. If a co-founder or partner invests his/her hours in helping you start your business while also working his/her own job, that is also an investment. Or, what about a founder making an office, machines or a technology license available? All of these are sources of investment. Temporarily not paying yourself any wage is also an option.

When to choose this source of financing: Founders can obviously invest in their own company at any time. However, you usually see this happening when the company has just been founded. When a company is set up, in many cases, no revenues or external financing is available, yet there are always some startup costs to cover.

In terms of investment size you can go all out (as far as your bank account allows you to). What is the advantage of this form of investment? It can be perceived as positive by an external financier that a founder has some “skin in the game” as well. Why would another person take the risk of investing in your company if you have never been prepared to take the risk yourself?

The 12 Best Sources Of Business Financing

Where and how you finance an operation can be the difference between dominance and failure. All money may sound like good money in this environment. It isn't.

Often it makes the most sense to tap a few different sources of capital. One deal I arranged involved seven funding sources. That sounds like a hassle, but it ended up greatly reducing the company's cost of capital and saving it from bankruptcy.

There are myriad financing sources available for American entrepreneurs (see Handbook of Business Finance at  Here are the 12 best, from least attractive to most. Two glaring omissions: venture capital--VCs fund just 3,500 of the 22 million small outfits in the U.S., and they only tend to hunt for companies with the potential for torrential growth--and a founder's own savings. If you don't know by now that financiers want to see some of your own skin in the game, you may already be in over your head.

12. Angel equity. If you must sell an ownership stake to get your company off the ground, start by finding a respected industry executive who is willing to invest a reasonable amount and give your venture credibility with other investors. The advice and networking--without all the heavy-handed demands of a VC--come in handy, too.

In Depth: 9 Alternative Ways To Raise Cash Now

Checklist: The 20 Most Important Questions In Business

11. Smart leases. Leasing fixed assets conserves cash for working capital (to cover inventory), which is generally tougher to finance, especially for an unproven business. Warning: Don't put so much money down that you end up spending the same amount of cash as you would have had you bought the asset with a down payment. The cost of a lease may be slightly higher than bank financing (see source No. 10), but the cost of the down payment you did not have to make is likely to be less painful than the dilution you suffer from giving away equity.

10. Bank loans. Banks are like the supermarket of debt financing. They provide short-, mid- or long-term financing, and they finance all asset needs, including working capital, equipment and real estate. This assumes, of course, that you can generate enough cash flow to cover the interest payments (which are tax deductible) and return the principal.

Banks want assurance of repayment by requiring personal guarantees and even a secured interest (such as a mortgage) on personal assets. Unlike other financing relationships, banks offer some flexibility: You can pay off your loan early and terminate the agreement. VCs and other institutional investors may not be so amenable.

9. SBA 7(a) loans. Of all the federally sponsored debt-financing programs, this is the most popular, and perhaps the best. It loosens the flow of credit by guaranteeing the lender against a portion of any loss incurred on the loan. Not to say that banks aren't careful when making 7(a) loans: They are required to keep the non-guaranteed portion on their books.

The interest rate can vary based on the size of the loan, with smaller amounts costing a little more. Shop around. Some banks reap servicing fees and nice profits by selling the guaranteed portion of the loan to insurance companies and pension funds; in those cases, a lender may be willing to offer you a better rate.

8. Local and state economic development organizations. Economic-development organizations can charge tantalizingly low interest rates when lending alongside a bank.

Say you need to raise $200,000 for a building. A bank may offer $150,000 on a first mortgage at a variable interest rate of prime, now 3.25%, plus 200 basis points, for a total of 5.25%. The local development entity might lend you another $30,000 on a second mortgage at a fixed-interest rate of 4%, without seeking equity shares or warrants. (Without the development corporation's contributions, you would have to scare up $50,000 in equity--expensive.) If you don't have the cash flow to cover the interest, the development organization may offer extended terms. Some loans are interest-only for the first year or two, and even the interest payments can be accrued for a certain time period.

Development groups may not agree to finance an entire operation, but they make snagging the remainder from other private sources a lot easier. Talk to your local chamber of commerce to find these programs. (Also check  for a list of the types of development finance organizations).

7. Customers. Advance payments from customers--assuming the terms aren't too onerous--can give you the cash you need, at a relatively low cost, to keep your business growing. Advances also demonstrate a level of commitment by that customer to your operation. About half of the world-beating entrepreneurs in my book, Bootstrap to Billions (see  were funded by their customers. This strategy allowed them to grow faster and with limited resources, and to operate with relative impunity with respect to their investors.

6. Vendors: Dick Schulze built Best Buy with financing from large consumer electronics firms--in other words, his suppliers. This way, your financiers do not control your growth; you do. Just be sure not to enslave yourself to a handful of powerful suppliers in the process.

5. Friends and family members. If you're lucky, friends and family members might be the most lenient investors of the bunch. They don't tend to make you pledge your house, and they might even agree to sell their interest in your company back to you for a nominal return.

4. Small Business Innovation Research (SBIR) grants. Getting past the paper-intensive application process and SBIR grants can be a great way to turn your intellectual property into mailbox money. For more on these grants, check out How To Get Uncle Sam To Fund Your Start-Up.

3. Tax Increment Financing. TIF subsidies are geared toward real estate development in targeted areas. Depending on the state, the subsidies can be as large as 20% to 30% of the cost of the project. Better yet, you may even be able to borrow against this subsidized value. If your own community does not offer a TIF program, look at communities that do. You may end up a little farther from your home or office, but it could be worth your while.

2. Internal Revenue Service. No, the IRS does not lend money. But it does allow you to deduct expenses. If you are paying a heap in taxes, evaluate whether you can use your profits to expand your business--and reduce your tax bill.

1. Bootstrapping: Many billion-dollar entrepreneurs find a way to grow without external financing so that financiers don't control their destinies or grab a disproportionate slice of the wealth pie. For more on the sound strategic thinking you'll need in order to live on your own cash flow, check out The 20 Most Important Questions In Business.

Dileep Rao has financed over 450 businesses. He is the author of Bootstrap to Billions: Proven Rules from Entrepreneurs who Built Great Companies from Scratch and Finance Any Business Intelligently. For more information, please go to

In Depth: 9 Alternative Ways To Raise Cash Now

Checklist: The 20 Most Important Questions In Business