RedSky

Funding for new businesses and how to get hold of it

Starting a new business is a huge leap of faith, and finding funding for new businesses to do it can pose a serious challenge. There are various types of business funding available, but any lender will require a huge amount of information before parting with their funds.

Usually people starting a business do it to monetise their passion and their skill, as opposed to being already amazing at running a business. The business planning element is usually a huge hurdle for potential start-ups to overcome, and can even stop people from starting their business in the first place.

Unfortunately for the less business-savvy, a business plan is an absolute prerequisite of being considered for business funding.

The business plan gives potential business owners the chance to write down their goals and ambitions, as well as the ways in which they plan to reach them. Once underway, the business plan is not only useful for the bank / lender, it can also help the entrepreneur to spot gaps in their skillsets, and work out how to overcome them. They show the lender that the company is serious, and has given thought to all aspects of the potential business, therefore reassuring them that their money has a good chance of not being lost on a failure.

At Red Sky, we have been helping companies get off the starting blocks for years, and have put our experience into some handy bullet points to help with writing a business plan to gain funding for new businesses.

The business plan needs to possess some key components:

Business summary – what function will the business serve? What market is it going into, and what will be its USP.

Goals – What will be used to measure success? Some key indicators could be: revenue, employees, stock, turnover, the list goes on. In any event, the ambitions for the business should be SMART – Specific, Measurable, Achievable, Relevant and Timely.

People–  Who will run the business? Why are they worthy of doing so? A lender will be investing in the people as much as the idea, so they need to have faith that they have the right skills and experience to do so.

Products and services– What will the company sell? How will it be priced? Have you considered the competition? What other products and services are in the same market? How do they compare? How will yours stand out?

Marketing – Who are you going to market to? Where/who/what are your customers? What messages do they need to read? Where will they read them? How will you close the sales? What branding are you going to use? Will you have a website/social media/brochure/flyer? Include as much detail in here as possible, perhaps consider incorporating a separate marketing plan all together.

Premises – Where will the business operate from? Have the price or rent/rates/utilities etc all been taken into account? If working from home, is this sustainable over a long period or will there be a move to an office planned down the line?

Finances– For a loan company this is arguably the most important section of the plan. Template twelve month cash flow forecast spreadsheets are usually provided by loan companies/lenders, and provide a good starting point from which to consider every aspect of business income and expense. The numbers included should have been well considered, and erring on the side of caution is a good idea. Each number in the spreadsheet might be questioned, and so all need to be justifiable. The total sales needs to include the cost of sale, and hopefully repeat custom will decrease this cost over time. Consider revenue, footfall and conversion (in the case of retail), and then go back to the marketing plan to work out how to achieve this. Considering all these elements should help to make a sensible forecast.

So now the business plan is created, what funding for new businesses is out there? Here we’ve summarised the types of funding available to allow the right choice for the fledgling business.

Start-Up Loans

Despite being available to businesses sometimes even before they start trading, start-up loan companies base their decisions on the business, as opposed to the idea. In order to qualify for a start-up loan, there needs to be a clearly defined timeline for the starting period.

The government wants to encourage new businesses, so the benefit of a start-up loan is that it is government-subsidised and has a fixed interest rate of 6%. Lending a maximum of £25,000 per director of partner, these loans do of course need to be paid back, but offer a good starting block for new businesses.

Seed Corn Funding

Illustrated by the rich and famous on Dragons’ Den, seed corn funding offers investment in return for a percentage stake in the business as opposed to a loan. This is considered to be very high risk for the investors, as many new businesses are doomed to fail, therefore the amount of equity that an investor will expect in return is also very high. They will expect the business to have high growth potential and be infinitely scalable to have the best chance of a decent return on their investment.

The ideal product for a seed corn funder would be an innovative high-tech product which is patentable / not copyable. It is unlikely that a service-based industry would be relevant to a seed corn funder.

Crowdfunding can also be considered as a form of seed corn funding and is becoming increasingly popular. We have written about this elsewhere.

Grants

Government-funded grants can sometimes be available to help businesses research and develop their business ideas and test their market viability. Different regions have different offerings via grant schemes, depending on their individual strategies for economic growth.

Creative England

As suggested by its name, Creative England assists businesses in the creative and digital industries, as well as those industries which impact upon this sector. Both loans and equity-based investments are available for funding for new businesses

Find out more about start up loans