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Starting your own business - A Guide


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Starting a business is one of the most exciting and scary things you can do as an adult. Here you'll find out how to go about starting a business, where to go for business finance, business loans and how to go about preparing your business plan

Have I got the right idea?

There are an estimated 4.5 million small businesses in the UK (Source: Department for Business Enterprise & Regulatory Reform; August 2007) and no reason why you can't join them.

It is said that all good things come to those who wait. Not true - at least in business - good things will come to those who plan, work hard, go without and take a leap of faith. And that's not to mention preparing to lose everything and start all over again.

Often, good ideas are carried around with us for years before they become ripe enough to do something about. At this point you might be raring to turn what has been a glint in your eye into reality - but actually, this is the time to sit back, take stock and start the paperwork.

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What's the market for my business?

The first research you must do will establish the grounding for your business idea by researching the market. The best place to start is probably the internet but don't be passive; test out your acting skills by posing as a customer to similar businesses and enlist your friends to do the same. At the end of a week or two of this you will know considerably more than you did at the start of it.

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Do I need to patent my idea?

If your idea is more of an invention than a concept, you will need to get a patent for it. You can do this through the UK Intellectual Property Office . It only costs £30 for the initial application and around £200 if you are granted the actual patent. But the entire process can take as long as four-and-a-half years! So the earlier you start the ball rolling the better.

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Am I the right person to start a business?

Even the best ideas in the world would not become a reality unless the inventor possesses the following qualities:

Perseverance: Most successful entrepreneurs have previously overcome a string of failures but continue to persevere despite financial, social and emotional consequences. It took James Dyson more than 20 years to succeed. He went solo as an engineer and entrepreneur in1974 but only in 1993 was the first Dyson (DC01) launched. The bag-less vacuum cleaner now outsells its competitors by five-to-one.

Single-mindedness: In 1888, John Boyd Dunlop (a Scottish vet who was living in Belfast at the time) invented the air-filled pneumatic tyre (as well as the word pneumatic). People at the time thought he was nothing short of a crackpot but his single mindedness has allowed us all to drive cars at high speeds not to mention preventing our teeth rattling when riding a bicycle.

Ambition: 'Entrepreneur' and 'unambitious' is a contradiction in terms. It goes without saying that anyone even reading this guide will be the ambitious type. But keeping ambitious and never resting on your laurels is what separates the wheat from the chaff.

Commitment: If your dream is to build a multi-million pound global phenomenon, there will be little room in your life for anything else. Be prepared then for everything else to suffer including your family life and relationships. Those who have faith in you, however, will still be around when you have made your millions and have plenty of time on your hands to spend it.

Self-belief: Believing in yourself and your product is as vital as the product itself. Even if your business turns in to a roaring success, its reputation is always very delicate. Back in 1991, Gerald Ratner wiped £500m from his own high street jewellery company when he joked publicly that a 'prawn sandwich' would last longer than a set of 99p earrings bought from one of his stores.

Do you need a credit card for your business?

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Do I need a business plan?

The short answer to this is yes. Even if you're funding the business yourself and the business plan amounts to an initial reference document, it's still of vital importance. You can use it to judge where you went wrong or right in subsequent phases of your business' growth and assess how close your expectations were to reality.

Yet for most people a business plan is a totally foreign concept until the point at which they need one - and then it just becomes daunting. But help is at hand. Sample plans are available from likes of your local high street bank and the Federation of Small Businesses and you can find further information at the government's Enterprise Directorate website and Business Link .

If you are relying on any form of outside funding, your plan will need to be detailed and you will be held more accountable to it. It will need to include what stake each investor has and a financial forecast over a three to five-year period detailing when and how a return will be raised on the investment.

You will also need to budget for contingency funds that will carry you through rough patches. Usually this amounts to between 10-20% of the total sum you wish to raise. Most businesses require initial funding so your business plan will have to be robust enough to inspire confidence in your bank before it will release any money.

Are you looking for finance to help grow your business? Check out your commercial mortgage options now.

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What should be in my business plan?

The following considerations should be set out clearly and concisely in any good business plan:

  • What you are offering: A clear definition of what the product or service is.
  • Why it will work: This part of the plan amounts to a quantifiable analysis of the opportunity. It will involve you carrying out some market research and gathering opinions. Is there a gap in the market? Are the current products and services on the market inadequate or lagging behind? The more you find out, the more robust your business plan will be.
  • How you are going to fund it: Businesses cost before they earn and usually more than you anticipated. Of the 500,000 small businesses that start up every year, 300,000 fail as a result of finances (Source: Federation of Small Businesses, January 2007). This part of your plan should include how you will fund the start up and running costs, what your targets are and how will you pay yourself and relevant staff.
  • What you intend to achieve: A written overview of the business' aims. This could be a financial target or a goal within your chosen industry. Try to be as precise as you can about these. 'To take over the world' is not going to convince the bank to lend you any money.
  • Who will be running your business: If this is just you, list your past work experience and any qualifications you have - but ensure they are relevant. A large part of the success of any business is about psychology and listing your silver badge for swimming is not going to inspire confidence. If there are other people working in or contributing to your business, include their CVs and credentials also.
  • How people will know about your business: Sales and marketing is of paramount importance in this highly-competitive consumer age. Think carefully about how you will make your business known to your potential customer base and how you will fund the cost of this.

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Can I get a business loan to help me start?

Shakespeare's famous line from Hamlet , "neither a borrower nor a lender be," was never going to make him rich. Whatever way you look at it, starting up a business is expensive. Even if your product or service is cheap to produce, you will not be earning while you are trying to get it off the ground. In short, you will need money to make money. Once you have a top-notch business plan under your arm, you can use the following options to raise your finance:

Secured and unsecured loans

If you are a homeowner, one option to raise finance is to take out a further advance on your mortgage. Mortgage interest rates are still low relative to other forms of borrowing. However, tying your home up with a business that has no history is a risky strategy because if your business doesn't make enough money to pay off the extra borrowing and you don't make the payments, the lender could repossess your house to pay off the debt.

You can take an unsecured business loan through almost any high street bank, which are usually capped at £25,000. You can choose the term of your loan which typically extends up to 10 years. You can also choose whether you want a fixed or variable rate of interest.

Some flexible business loans offer perks such as a repayment or interest-free period or a payment holiday each January. Business loans are offered by a wide variety of lenders.

If you have tried and failed to get a small loan for your business due to lack of security, it is worth contacting the Small Firms Loan Guarantee Scheme (SFLGS) that may act as a guarantor for finance up to £250,000.

Family loans

If your family can lend you the money at a competitive interest rate - or even better, interest-free - you are in a very privileged position. However, falling out of favour with your family over money is arguably worse than any other financial crisis. Therefore, it is crucial that you take the loan and a repayment schedule as seriously as if you were borrowing from a bank.

Overdrafts

Most business current accounts come with an overdraft. The level of overdraft you qualify for will depend on your business, credit status and level of free cash flow that will repay the overdraft as it is being used. But £5,000 from a high street bank is typical.

Overdrafts represent the most negotiable of lending options and so the interest rate you pay will vary enormously on a case-by-case basis. However, you will probably have to pay an arrangement fee up front and an annual fee. If you go over the agreed limit there is usually a flat charge of £20. Often, this is then multiplied for each £100 you have exceeded your limit by. Interest on excessive borrowing can reach over 29% APR - and this is not negotiable.

Looking for a business loan? Do you need financial assistance to grow your business?

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Can I get any grants for my business?

The government offers a very limited number of grants for businesses and they will come with specific criteria and conditions. For example, if you are operating from a rural area, trading in a certain area of businesses or you are under 25 years old.

If you think you may qualify for a grant, it is certainly worth checking as it will provide a once-in-a-lifetime chance to get your hands on some cash that will never have to be repaid.

Your first port if call should be Business Link , which lists over 2,500 different sources of grants and advice in its Grants and Supports Directory. Your Local Authority or Citizens Advice Bureau will also point you in the right direction in getting a grant - but don't bother asking your bank for one.

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Should I raise money from venture capitalists?

Using a venture capitalist (VC) who gives you money in return for a share of your business, is one of the most harrowing ways to raise finance. Success - even if it arrives - can take between six and nine months and it is likely you will find you have compromised far beyond your initial plans. You will also have to concede that the business will not be entirely yours. All investors will want answers - and regularly. On the plus side, VCs are also one of the most cash-generating methods of getting your business off the ground and you are sharing your risk.

If this is the route for you, the first thing to do is to get utterly prepared. The venture capital marketplace is extremely competitive and for every company a VC chooses to invest in, they will have seen 100 business plans or even more.

Scour the internet for venture capital funds that are appropriate to your business according to its industry sector, size, stage of development and how much investment you need. You will find a lot of this information on funds' websites. Have your speech prepared before you telephone the fund manager and be concise and brief. If you are lucky, and they display some interest, follow up the call with a brief executive summary of the business straight away.

If you get through this stage, you will need to send a copy of your business plan. This must be very professional and comprehensive. VCs will need to be inspired with your plan as well as be confident that you know what you are doing. Their ultimate aim is to put their experience with your idea and make themselves more money.

If the plan goes down well, it is likely that you will be invited in to put on a presentation of your business. In true BBC TV Dragon's Den style, expect to be grilled, criticised and pulled apart. But, although you will need to be 100% on the ball, don't forget to let your personality out. However great your idea, a lot more decisions hinge on whether people like you, than you might imagine.

It is likely that a 'term sheet' will then be arranged by the venture capitalists stating an initial offer. Remember this is negotiable so don't be afraid to come back with a counter-offer - they might even want you to! After these mind games, and once a final term sheet has been agreed, a draft agreement will be drawn up and the VC will begin to take formal Due Diligence. You can then sign the contract and take the money.

Does your business need money? Are you looking for a business loan?

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Will the Prince's Trust help?

Of course there are several generic benefits to being under 30; but if you are insightful enough to be starting up your own business, there are some additional ones too.

The Prince's Trust offers entrepreneurs between 18 and 30 very low interest loans of up to £4,000 for a sole trader or up to £5,000 for a partnership in order to get your business off the ground. It may also provide a grant of up to £1,500 in special circumstances and a test marketing grant of up to £250.

At worst, the Prince's Trust will offer anyone in this category a wide range of products, services and support, including a free legal helpline (on 0800 842 842). However, you will still have to come up to scratch with a comprehensive business plan and a great idea. New Entrepreneur Scholarships may also be able to help with training, advice and initial funding for new businesses in disadvantaged areas.

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What premises will I need?

If you're a one-man-band business, the cheapest option is to work from home. It means less initial outlay while everything from the heating, lighting even down to the portion of mortgage interest on the room of the house that you make an office, is tax-deductible. However make sure your mortgage lender agrees to you using your home as business premises, and also you'll need to make sure it's covered under your home insurances.

If in your mind 'home' is too close to 'relax', you can always rent out a single desk in a nearby office. As well as keeping home and office separate, this environment will pressure you to work nine-to-five, keep up your 'telephone voice' and ensure that you are never conducting business in your pyjamas.

If you are hiring staff and need an office exclusively for your business, you will have to decide whether it makes sense to rent or buy. There are pros and cons to each. Renting frees up more capital that you can invest into the business and provides more flexibility if you need to up- or downsize. However, you may be tied into a contract that makes it difficult and expensive to just up sticks and leave. You may also be paying over the odds in rent and missing out on potentially valuable capital gains that could be channelled back into the business some years down the line.

Running your own business? Have you got it covered? Check out our business insurance rates

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How do I promote and market my business?

The selling and marketing of your business is just as important as the business itself. Shallow as it may seem, in such a competitive consumer environment, no one will even sample your goods or services if your image is wrong or the business is presented badly.

Online: The right website is crucial and should be your first consideration. If you are not a dab hand with the worldwide web, there are plenty of web designers that will do the job for you - although, unless you know an expert personally, you will have to factor this into your budget. You may also need to consider the name of your business at this stage - it makes sense to have your business name as your URL - if someone else already has that website you may need to consider changing the name of your business or risk serious confusion on the part of potential customers.

Advertising: It is very expensive to advertise in the national press or on television and radio so you will have to start small. Research the cost of adverts in your local newspapers or consider putting fliers through people's doors in the area. Word of mouth is also a great advertiser so make sure when you do sell your product or service, you deliver 100% standard and satisfaction.

Public Relations: If you can't afford to hire an agency, you can have a go at some PR yourself. The aim is to get positive coverage of your business in newspapers, magazines, websites and even on television and radio. A positive review of your business from an unbiased source is far more effective - and less costly - than taking out an advert.

You could start by sending out a short press release of some interesting research or a quirky story. The trick is not to simply plug your business - it could be that you even make fun of it. For example, in 2001, a cleaner at a London's Eyestorm gallery cleared away an installation by artist Damien Hirst, having mistaken it for a pile of rubbish. The collection of beer bottles, coffee cups and overflowing ashtrays was supposed to represent the chaos of an artist's studio. Eyestorm took the story to The Sun and the newspaper ran a weekly column for the cleaner in question to air her views on different pieces of contemporary art - invaluable PR for the gallery.

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What's the tax situation with my business?

Tax, like death, is one of the certainties in life, and equally unavoidable. The rules surrounding what tax you pay vary considerably according to your answers to the following questions:

  • Are you setting up in business as a self-employed individual, or as a limited company / limited liability partnership (LLP)?
  • Will anyone be working for you as an employee?
  • How much turnover do you expect to have in your first year of business, and how much profit do you expect to make?

Looking at the list of taxes that will or may be payable is rather like playing a real life game of Monopoly. But then no one said setting up your own business was easy:

Income tax and self-assessment: This works differently for self-employed people.

National Insurance contributions: There are several different forms of this but to qualify for a state pension you'll need to keep up payments.

VAT (Value Added Tax): If your turnover hits or is expected to hit £61,000 a year, you must register for VAT.

Corporation tax: This is tax payable on profits to HMRC (HM Revenue & Customs, formerly the Inland Revenue).

Business rates: Every business that operates business premises must pay these rates to their Local Authority (think of them as the business equivalent of council tax).

Capital Gains Tax: This must be paid on any profit made if and when the business/asset is sold.

Stamp Duty: This is collected on the purchase of property, stocks or shares when a long or high value lease is signed.

Importing and exporting: If your business involves importing goods from outside the European Union, you may be subject to this tax .

Business taxes are complex and you will almost certainly need to enlist the help of an accountant. If you are setting up a company or LLP you will definitely require the services of an accountant to audit your financial reports and submit returns to Companies House.

For more information, visit How might NI and tax affect your business? on the HM Revenue & Customs website.

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26 February 2008 © Moneyextra.com

 

Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.