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How to fund your new business

Capital is essential for any new business, and if you’re an ambitious business owner you’ll no doubt have big plans that will require some financial backing.

4 minute read

There are number of avenues available to young and growing companies seeking finance, but before you start investigating the options, you’ll need to have a handle on what you’re looking for.

Establishing capital

A business plan underpinned by a financial model (ideally integrated cash flow, profit & loss and balance sheet) is the best way to understand your capital requirements even if your business is relatively small. You’ll need to factor in start-up and ongoing costs, what revenue you’ll have coming in -  and when.

Financial forecasting involves a mix of art and science, especially for young businesses, but the aim is to neither over or underestimate your potential revenue. Asking an experienced businessperson or advisor to look over your numbers can help.

Once you have a clear understanding of the capital you need, it’s time to start looking at financing options.

Personal funding

Many new business owners begin their search close to home, self-funding their start-up through personal savings or twisting the arms of friends and family to invest. Others borrow against their own home. While this approach can help court lenders (by showing you have literally backed yourself), this is only an option for those who have a substantial nest egg or a foot on the property ladder.

Friends and family investors are commonly called the ‘three f’s’: friends, family and fools. People you know well are more likely to believe in what you’re doing and back you, but this kind of financing still needs to be managed professionally. Ensuring the terms of any business loan or equity stakes are agreed upon and documented, can help keep personal relationships intact no matter what happens down the track.  

Independent funding

Bootstrapping is where a business funds itself out of cash flow. This is another route for the self-reliant. While this is a lower-risk financing option, and allows an entrepreneur to retain full ownership, the success of this strategy is highly dependent on the type of business you’re in. A start-up that generates instant and recurring revenue that requires minimal capital outlay may thrive on bootstrapping, but firms with high set-up costs and lumpy sales cycles may struggle.

Outsourced funding

Business loans are another option. There are a number of providers, including banks, who offer loans at varying interest rates, however lenders generally require proven and sustainable cash flows before they’ll lend against a business.

Angel investment and venture capital – where high net worth individuals or groups provide capital to young, ambitious businesses – are financing options that can provide an additional benefit: smart capital. Such investors will often inject their knowledge, experience, networks, and cash into young companies. Generally however, this is in exchange for an equity stake and, because this investment is highly sought, you’ll need to have a credible team and stellar pitch to win this kind of backing.

Crowdfunding

Crowdfunding – where businesses run online campaigns to gain funding from a large group, or ‘crowd’, in exchange for an equity stake or rewards – is fast growing in popularity. As well as raising funds, crowdfunding campaigns can help a company generate a strong and passionate customer base.

But you can’t just load a campaign video and wait for the cash to roll in; successful crowdfunding requires meticulous planning and dogged campaigning to get it over the line. And a final note: if your campaign is successful, make sure you deliver on your promises to keep your founding funders happy.

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