Financing a startup - key considerations

Author: Jim Riley Last updated: Sunday 23 September, 2012

Finance - Things for a start-up to consider when raising finance

Often the hardest part of starting a business is raising the money to get going.
An entrepreneur might have a great business idea and clear plan for how to exploit a market opportunity. However, unless sufficient finance can be raised, the entrepreneur will struggle to make the most of the opportunity.
Raising finance for a start-up requires careful planning. The entrepreneur needs to decide:

How much finance is required? Raising finance is hard work and expensive – the start-up should avoid having to go through the process too often!
When and for how long the finance is needed? A useful distinction can be made between long-term, medium-term and short-term finance
What security (if any) can be provided? This will affect the ability of the business to raise a bank or other loan where the lender requires some security (or “collateral”)
Whether the entrepreneur is prepared to give up some control (ownership) of the start-up in return for investment?
Whether the cost of the finance (e.g. interest charged) is justified

The finance needs of a start-up should also take account of these key areas:

Set-up costs -the costs that are incurred before the business starts to trade
Getting ready to produce - the fixed assets that the business needs before it can begin to trade
Working capital (the stocks needed by the business –e.g. raw materials + allowance for amounts that will be owed by customers once sales begin)
Growth and development (e.g. extra investment in capacity)

An important consideration when obtaining finance for a business is when and for how long the finance is needed. A useful distinction can be made between long-term, medium-term and short-term finance. The table below summarises the main examples and uses of each category:

Long-term	Medium-term	Short-term
Finances the whole business over many years	Finances major projects or assets with a long-life	Finances day-to-day trading of the business
Examples:	Examples:	Examples:
Retained profits Share capital Venture capital Mortgages Long-term bank loans	Bank loans Leasing Hire purchase Government grants	Bank overdraft Trade creditors Short-term bank loans Factoring