New Year - new business venture, how to fund it

Resolved to set up your own business in 2008? You won't be alone it seems; earlier this year a NatWest survey indicated that 4 million UK employees planned to quit their jobs within a year to go it alone. Is this a wise time, financially speaking, to strike out on your own? Credit is still being crunched and there is no immediate indication of the vice being disengaged. Also, unless youre planning to start a banking operation, it is extremely doubtful whether you would be bailed out by the British taxpayer should you run into financial trouble.

Yes, dragons and apprentices frequently find it a doddle to set up a thriving business, but the real world doesn't always coincide with the TV image. It is estimated that 25% of new business owners are tempted to quit (many do) in the first five years of operation because of lack of finance and cashflow problems, and unrealistic marketing knowledge.

Take note that, according to Bank of Scotland's confidence index, small firms are less confident about business prospects now than they were three months ago; 60% of small business owners questioned believed economic conditions would worsen in the year ahead (a 24% increase on last year) while only 7% thought the business climate would improve.

Finding the money

However you're an optimist and you have the utmost faith in the viability of your proposed business product or service. So, given that hurdle No 1 is inevitably the financing, where do you get the money to fund your venture?

Unless you've got several thousands stashed away in, say, an ISA account, which you are prepared to invest in your business, then you need financial help. This could be achieved by tapping family and friends, an overdraft limit or personal loan from your bank manager, remortgaging property or taking out a secured loan.

Are you looking to remortgage to fund a business start-up?

Private investors could be interested if you are prepared to concede equity. Dragon James Caan was recently reported as saying that the key to a successful start-up is too talk to as many people as possible and to chase all potential sources of funding. "Do whatever you have to. Hit angels, banks, friends and family. You do not know who will bite."

Business angels, as well as providing cash, can supply their own skills, experience and contacts for the benefit of your new business. Find them through the British Business Angels' Association.

Grant available? Credit good? If you intend going it alone without outside investment (and likely loss of equity), and a loan is necessary where do you source the best deal?

Before taking on debt, though, check whether you qualify for any grants or subsidies by searching the directory at Business Link and also ensure you are fully au fait with your credit situation (check your credit report).

Your credit rating will determine how competitive a personal loan you can obtain. If you can afford or obtain one, that is, because with the global credit crunch the average rate charged on personal loans has nearly reached double figures and some providers have pulled out of the market altogether.

Sainsbury's Bank claims to be bucking the trend by reducing its rate to 6.5% APR typical for loans from £7,000 to £25,000 (limited offer, online application).

Looking to borrow money? Check out the most competitive unsecured loans around right here.

Your existing bank could well prove the best source for a loan, especially if you have built up a good track record of sensible financial behaviour and go armed with a sound business plan. It's argued that banks compete for start-up business accounts in much the same way as they do for student bank accounts; they look to a future of fatter margins, derived from other products and services, as your business expands.

A local bank is more likely to understand your business; good quality advice and guidance from your bank manager should take precedence over any service gimmicks or free business banking offers (it's been said that one of the most stressful issues when running a business is having a bank that doesn't understand you!).

Check out all your business financing options now

20 December 2007 © Moneyextra.com

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