This revision presentation highlights the key sources of finance potentially available to a new business and outlines the key issues when choosing the source and mix of finance.

1. Obtaining
Finance for a
New Business

2. Why finance matters
• A start-up can’t survive without
sufficient finance
• There are various sources of finance
available for new businesses
• However, many start-ups struggle to
raise finance until the business is
established
• Finance provided from the personal
sources of the entrepreneur is very
important

3. Key finance issues for start-up
• How much cash? Finance is needed for…
– Enough v not too much
– Safety buffer
• When?
– All at once?
– Drip feed / as needed?
• Challenges
– Keeping control of the
business
– Staying afloat

4. Key considerations
• How much finance is required?
• When and how long the finance is
needed for? (this links in with cash flow
forecasting)
• What security (if any) has to be
provided?
• Whether the entrepreneur is prepared
to give up some control (ownership) of
the start-up in return for investment?

5. Main types of finance sources
Internal Sources External Sources
Founder finance Bank loan
(various personal Bank overdraft
sources of the
entrepreneur) Business angels
Retained profits Loans & grants
Friends & family

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

7. Share capital
Share capital is the money
Shareholder Number of Shareholding
invested in a company by the Shares
shareholders. Share capital is Angela 300 15%
a long-term source of finance.
In return for their investment, Nicolas 400 20%
shareholders gain a share of
Gordon 600 30%
the ownership of the
company. Barack 700 35%
An illustration of an example
company share ownership Total 2,000 100%
structure is shown opposite:

8. Retained profits
• This is the cash that is generated by the
business when it trades profitably
• Retained profits can generate cash the
moment trading has begun
• For example, a start-up sells the first batch
of stock for £5,000 cash which it had
bought for £2,000. That means that
retained profits are £3,000 which can be
used to finance further expansion or to pay
for other trading costs and expenses

9. Personal sources of the entrepreneur
• Entrepreneurs find various personal
sources to finance their start-ups: e.g.
• Cash and investments
• Redundancy payments
• Inheritances
• Personal credit cards
• Re-mortgaging
• Putting time into the business for free

10. Why personal sources are important
• Cheap (e.g. compared with
a bank loan)
• Entrepreneur keeps control
over the business
• The more the founder puts
in, the more others will
invest
• Little red tape or delay
• Focuses the mind!

11. Personal sources - redundancy
• Redundancy packages
often provide kick-start
finance for a new business
• Previous employers may
also provide other support
services (e.g. assets,
training)
• Other popular nest egg -
inheritance

12. Personal sources - Re-mortgages
• Raising new capital by re-
mortgaging
• Most popular form of
secured loan finance for
start-ups
• Long-term finance
• Impact of credit crunch
may restrict this source in
future

13. Personal sources - credit cards
• The most popular
source of short-term
finance for small
businesses
• 30 days free credit for
business-related
expenses
• Helps control over
start-up costs

14. Putting time in for free
• The entrepreneur works
for nothing (or very little)
• Entrepreneurs multi-task
until the start-up can
afford staff
• 18 hour-days by the
entrepreneur are cheaper
than an overdraft!

15. Bank loans
• Long-term finance
– Loan provided over fixed period
– Rate of interest either fixed or variable
– Timing and amount of repayments are set
– Start-up provide some security for the loan
• Good for financing investment in production
capacity (e.g. buildings, equipment)
• Generally at a lower rate of interest that a bank
overdraft
• But, don’t provide much flexibility
• Harder to get because of the credit crunch

16. Bank overdrafts
• Short-term finance, widely used by start-ups and
small businesses.
• An overdraft is really a loan facility – the bank lets
the business “owe it money” when the bank balance
goes below zero, in return for charging a high rate of
interest.
• A flexible source of finance, in the sense that it is
only used when needed
• Bank overdrafts are excellent for helping a business
handle seasonal fluctuations in cash flow or when
the business runs into short-term cash flow problems
(e.g. a major customer fails to pay on time)

17. Business Angels
• High net worth individuals who invest in
high growth businesses
• Dragons Den is an example!
• Investment range - £10,000 to £750,000
• What they look for:
– Expertise and track record of founders
& management
– Competitive edge or unique selling
point
– Growth potential of the market
– Cultural fit & chemistry
– Financial commitment of the
entrepreneur

18. Trade credit
• Amounts owed to suppliers for goods
supplied on credit and not yet paid for
• Delayed payment means that the business
retains cash longer
• Have to be careful not to damage firm’s
credit reputation and rating
• Some firms habitually delay payment to
creditors in order to enhance their cash
flow - a short sighted policy and raises
ethical issues

19. A couple of others
Princes Trust Small Firms LGS
• Lender of last resort • Loan guarantee scheme
• Targeted at under 30’s • Popular support for
• Offers more than the SMEs
money • Great for start-ups that
• Other lenders may struggle to offer banks
come on board once security for loans
accepted
• However, bigger profile
than reality

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