Page 5: Financing a new business
Some new businesses need little start-up capital. An online retail business like T&T Vision does not require substantial funds to buy premises or a large selection of stock for display. Other types of business require significant finance for premises, equipment and stock before they can start trading.
The owners of any new business, whether sole trader, the partners in a partnership or the shareholders in a limited company will be expected to provide some capital. However, there are other sources of business finance available to meet day-to-day expenses or to buy more expensive capital items:
- An overdraft. This arrangement, agreed in advance with a bank, allows a business to spend more than the funds available in its account up to an agreed limit. The business can dip into this 'pot' as and when it needs to, for example, to pay a pressing bill. The flexibility of an overdraft means the business can pay the bill immediately and the overdraft is automatically repaid once sufficient funds are deposited in the business” account. However, a business pays interest on the amount it owes. Interest rates on overdrafts can be higher than on other, less flexible, ways of borrowing.
- A business credit card enables a business to borrow flexible amounts quickly and for a short period of time. Banks will usually place tight limits on the amount that a new business can borrow on a credit card. If the amount borrowed is paid back in full at the end of each month, the business does not pay any interest. However, interest is charged on any remaining balance until the amount is repaid. Like overdrafts, these interest rates can be higher than other ways of borrowing because of the flexibility of the arrangement.
- A bank loan. Most banks offer bank loans for business. They are useful for borrowing larger amounts, for example, to pay for set-up or expansion costs. Barclays Barclayloan for Business is for businesses wishing to borrow between £1,000 and £1,000,000. The loan can be for up to 20 years and is repaid through regular repayments including interest. The advantage of this type of arrangement is that a business can borrow a larger sum of money. Also businesses can choose fixed interest rates so that repayments are the same every month. The business owner can also request a two-year capital repayment 'holiday' with Barclays where they just pay the interest. For loans up to £25,000 they can even request a complete repayment holiday where they pay nothing for six months before beginning to make repayments. Both of these repayment holiday options help cash flow. As with any loan, the business owners are liable for the debt if the business cannot make the repayments.
Other financing options from banks, such as commercial mortgages, are used to help purchase business premises. The premises will be used as security for the loan and if there is sufficient equity in the property (the difference between the mortgage value and what the property is worth) then the business can often top up the commercial mortgage to release cash for other business purposes.
Financial help may also be available from government agencies and charities such as The Prince's Trust. Many people seek these sources of loans and grants and the business may have to meet conditions. For example, it may have to be located in an area of economic deprivation or the owner may have to be under a certain age.
One avenue not usually open to business start-ups is venture capital. As the television programme Dragons' Den shows, venture capitalists put money into an enterprise in exchange for a share of the business. They would always expect to see some evidence of business success before investing.
A new business is also likely to need financial advice. Banks recognise that a business has different needs to that of an employed person who has regular pay coming into a bank account:
- A business needs a means of handling payments from its customers, of making payments to its suppliers and of managing its cash flow.
- For new business start-ups, Barclays offers free banking services (for at least twelve months) plus the support of a local business manager and other experts. Through its Local Business brand, it aims to provide support to help businesses prosper in their first trading months and years.