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Funding Guide

Starting your business, or expanding upon your existing business, can be very costly and if you’re going to need funding for your business or new venture to get off the ground, as many prospective business owners do, you need to see what’s available and what will best suit you and your business. Keep in mind that the first few years of operating a business are always the hardest as you’ll be investing much of your time, effort, and money and that may be before you even start seeing a profit. You will need to consider which funding option will work best for both your immediate start up needs, if you’re a new venture, as well as your longer range goals and needs that you will have as your business grows.

In this article, we will cover many of the common types of funding you can get to help start your business. We’ll talk about the advantages and disadvantages of each method so you have a good idea of which one you’d like to pursue. We are slowly adding in-depth articles for each funding method. There could also be other types of funding that may be more suitable for you as well that we haven’t listed so make sure to do additional research.

Business Loan

Likely the most popular method for raising money for your business, however depending on how much you need to borrow and what your business is, it can be very difficult to get funding. You’ll borrow a certain amount of money (most likely from a bank) over a set time period with added interest on your repayments. The interest depends on the borrowing period, the amount borrowed, and the borrower of course, but the interest rate can change depending on your lender. Normally you will have to show the bank an in-depth business plan along with realistic cash flow forecasts to prove to them that you’ll be able to pay them back with interest. The bank may ask for security against your loan which could be your house, car, etc. This is where you need to be absolutely sure that the business you’re hoping to create will be successful because you may be putting a great deal of your personal assets on the line.

Advantages

  • You can borrow a large amount of money
  • You may be able to pay back the loan early
  • No involvement in the business by the lender
  • You don’t have to share a percentage of the profits
  • They may offer fixed rate loans

Disadvantages

  • Can be difficult to be approved
  • They may have early payback fees
  • You will have to spend time creating a business plan and forecasting figures
  • Interest rates can be quite high
  • If you secure your loan to personal assets you could lose them if you don’t keep up payments
  • If you go for a variable finance rate it can be difficult to know what the interest may be in the future, making it difficult to predict future expenses

Angel Investor

An angel investor will buy a certain percent of shares and then share in the profit or the losses of the company. You could also offer this option to family and friends or even equity crowdfunding. An angel investor will not only buy equity within the business but also offer experience and knowledge with running a business too.

Advantages

  • An angel investor may be able to bring new skills and “open doors” for your business through their contacts, e.g. getting your product into large retail stores or getting your service partnered with another company
  • You won’t have to repay the money or pay additional interest
  • You will have another party to talk through your plans and to offer advice

Disadvantages

  • You will lose a share of your business and lose a part of the profits
  • You can only do this if you’re a limited company
  • You will have to consult with your investors before you make decisions for the business, which they may disagree with
  • If they buy a larger share than you do, then they would have control of the business

If you think a bank loan may suit your business, see our article “Getting a Business Loan” for more details about this funding option.

Remember a small share of a successful company is worth more than all of a company that has failed.

Grants

A grant can be a great way to get funding for your business as you won’t need to pay it back. A grant is normally given to you for a specific purpose, such as to hire more staff or to buy equipment. You apply for grants most often through your national or local government, for example in the UK, you would apply through the EU and your local councils.

Advantages

  • You don’t pay it back
  • You don’t lose a share of your business or your profits

Disadvantages

  • In can be a very long process and you may not being granted the money
  • There is a lot of competition
  • You will have to find a grant specific to your business which might not exist
  • You may have to put up an equal amount of money as they give you for the specific purpose you apply for
  • You may have to show evidence that the money has gone to the purpose it was granted for
  • They can ask you to spend the full amount and then they’ll reimburse you their part once you provide receipts, etc.
  • Most grants are for proposed projects, not ones that are already in progress

Although a grant can be like free money to boost your business, as you can see, there are a lot of disadvantages and most people who apply for grants don’t get them. However if you’re interested in looking more into Grants take a look at our in-depth article Grant Funding to learn more.

Rewards-based Crowdfunding

Crowdfunding has become very popular over the past few years with the help of certain websites, such as Kickstarter and Indiegogo. It’s a way to offer something from your business for monetary donations from a potentially large number of investors until you reach your target amount. Each investor normally contributes a small amount in return for something such as the first release of your product or an item from your online store like a t-shirt.

One of the biggest strengths of this form of crowdfunding is in the potential it has as a marketing tool to gain exposure for your brand and a way to establish a community of supporters for your business. It can also help to tell you if there is an interest and a demand for the product or service that your business is providing.

Funding is crucial for any business, but brand recognition and loyalty are priceless, so dont overlook the value of using crowdfunding to supplement your funding goals.

Advantages

  • It’s an alternate funding method which can potentially raise a huge amount of money
  • It can be quick and without upfront fees
  • This can also be a great marketing tool and way to build a community around your brand

Disadvantages

  • It’s sometimes difficult to get people to invest
  • If you don’t reach your target sometimes the money can be returned to the investors
  • If your business idea is unique and you don’t have a copyright or a patent then it could be copied and used by others

Overdraft

An overdraft isn’t really a long term borrowing method, but it can be useful if you need money quickly and are able to pay it back, for example after buying stock to sell. An overdraft is normally an amount agreed with your bank where the bank will cover payments made over the existing balance of the business’s account and you will be charged interest along with fees.

Advantages

  • It’s flexible and quick to get
  • You don’t normally get charged for paying it off early

Disadvantages

  • You are charged interest and fees which can be quite high and it has a variable interest rate
  • You can be charged if you go over your agreed overdraft amount
  • You can only get an overdraft with the bank that your business banks with
  • The bank can ask for the money to be paid back at any time

An overdraft should only be used for the short term and you should be certain you’ll be able to pay it off quickly. For example, if you have to buy stock and already have a buyer for the stock, then an overdraft would be perfect if you don’t have the money to buy the stock in the first place.

Venture Capital

Venture capitalists typically make larger investments than angel investors do and they tend to choose certain kinds of industries to invest in, such as technology, computers, and media to name a few. These investors are also often seeking the chance to make a huge return on the money they are going to contribute to someone’s business.

Advantages

  • It is possible to secure a large amount of funding to help you get your business or venture up and running
  • This funding option could possibly be a route for accessing other connections, which may lead to additional backing sources
  • You may gain the advice or insights of these experts, or even find a mentor

Disadvantages

  • The process of being approved by a venture capitalist may be quite stringent
  • You will most likely need to relinquish a great deal of control and freedom to make decisions about the direction of your business

Partner with a potential customer or another Business

This is where you join alliances with another business or a potential customer who is willing to help you with funding for your business in exchange for a royalty of the profits from your business.

Advantages

  • One significant benefit to this option is that your partner likely has a common interest in wanting your business to succeed aside from wanting to make a profit (they are probably in a similar or related field, and if you succeed it benefits their interests in more way than one)
  • You would receive the financing when you need it and only have to pay it back after a specified time once your business is making a profit

Disadvantages

  • The most obvious downside to this is that you have to share a percentage of your profits for a specified time period
  • You may feel accountable to the person or business you have partnered with and even responsible for any losses they may incur if your business does not succeed as you hope it will I’m not sure if this should be included or not, it was more my feelings than anything else.

Peer-to-peer lending

Peer-to-peer lending, also known as peer-to-peer investing, utilizes online platforms and matches borrowers and individual lenders. The landscape of this option has changed in recent years on many of these platforms, moving away from a true peer-to-peer model to more of a corporate-to-peer one however. The interest rates can also be quite high for these loans, which is one downside.

Advantages

  • You may be able to get a peer-to-peer loan fairly quickly
  • If you have less than stellar credit you may still be eligible, although your interest rate may be higher

Disadvantages

  • Interest rates may be very high

Join an incubator or accelerator organization

An accelerator or an incubator can also be a way to help new businesses or even those who are still in the process of developing the concepts of their business to get an initial boost. These organisations basically offer resources such as funds and workspace, as well as serving as a mentoring source in exchange for a small share or profit of the businesses they help. Y Combinator, for example, is an organisation that has helped many businesses to successfully get off the ground in such a manner.

Advantages

  • The key advantage is that you will benefit from the experience and wisdom of individuals who want to help your business become a success
  • You will also receive additional assistance in the form of supportive resources, often at no charge, and sometimes funding as well
  • These organisations may offer you help connecting with investors and securing legal services for your business
  • At a later point, your brand may receive recognition from the organisation for participating if your business becomes successful as a marketing tool for their organisation

Disadvantages

  • This can be a long process, albeit one of learning and growth, but it may delay the launch of your new business
  • You will need to be prepared to share some portion of your future profits with the organisation

Pay for the business yourself

This option may often be overlooked, but paying for the business yourself, also called bootstrapping, has one distinct advantage over all others. It allows you to maintain complete control over your business and all of the profits and assets. However, the ability to save the kind of money that you will need in order to get your business operational may take a very long time, or may not be realistic based on your income and expenses.

Advantages

  • All of the profits from your business belong to you
  • You don’t have to relinquish control to others

Disadvantages

  • It requires you to provide all of the funding up front and as needed

Other funding types are available such as invoice finance which is where a third party will buy your unpaid invoice (normally as a very low rate). There is also leasing and finance which can be used to buy machines, tools, office equipment, etc. and is normally given by the company you’re purchasing from. There are also private equity firms which offer another source of funding and you may want to consider researching this option to determine if it might be a good fit for your business.

Tips

We have presented the primary types of funding that you should consider when starting a new business or adding to your existing business, such as expansion to new premises, which may require finances beyond your reach. There are strengths and benefits to each one, and likewise, they each have factors that may make them a poor fit as well. You need to keep in mind that just as most things in business, it is about researching to discover what will be the right option for you and for the particular needs of your business.

  • Be prepared. Do a thorough analysis of your funding needs.
  • Don’t accept the first offer of funding too quickly, do your research first!
  • Be choosy; don’t accept money from just anyone. Know your lender. You want to make sure that you will have an easy time dealing with them in the years to come.

If you feel that any of the funding options we have discussed would be a good match for your business, then make sure to read the in-depth article for that topic to get a better understanding of what the particular funding method involves. Finally, remember that most importantly, perseverance will pay off in the long run. If you believe in your business idea or new venture, stick with the process of searching for the right funding option – it is out there, you just have to find it.

How to invest in property UK

buy to let tips and guides
buy to let tips and guides

If you’ve decided that buying a property to let out would be a good investment then you’re right. When you look at the potential earnings compared to having your money in the bank, which currently offers extremely low interest rates, it’s a no-brainer. However, usually you can only do this if you can afford the large deposit normally associated with a buy-to-let mortgage unless, of course, you have the money to buy a property outright without a mortgage.

What to look for when buying a property to let is the most crucial step to being successful. In this article we will be going through some of the main points you need to consider when buying a suitable buy-to-let property (as they are referred to).

Before going any further make sure your finances are in order and that you can afford to buy a property. Work on the worst-case scenario in terms of income you’ll receive. If you need a mortgage to buy a property, make sure you are eligible to get one. Also don’t forget to do your research! Do you know all the risks involved as well as the obvious benefits? It would be worth having a look at our landlord guide too so you are aware of all the responsibilities you will have as the property owner. Below are some of the main points to consider.

Can you get a buy-to-let mortgage? Most buy-to-let mortgages require a large deposit and can involve substantial arrangement fees. As an example, Barclays Bank, who are offering a 2-year fixed at 2.47% interest mortgage requires a 40% deposit along with a £1,999 arrangement fee. Many lenders can have strict terms too; Halifax wants you to own another property and be aged between 25 and 75.”

Net Yield

Net Yield is the main thing to look for when buying a property to let out; the higher the net yield the greater the return on your investment. For example, if you’re buying a property for £200,000 and it brings in £10,000 in rent that’s a 5% gross yield. You then work out your net yield which is after all your fees and costs, which can include managing agent’s fees, maintenance costs, etc. have been deducted. So if costs are £2,000 per year that would provide a net income of £8,000 which would work out at a 4.00% net yield.

Going back to the point earlier, which was to work on the worst case scenario, we’d recommend working on having the property rented for 10 out of the 12 months. So points to remember, work on Net Yield based on 10 months’ rental income.

Location

Location plays a massive part if you’re going to succeed in letting out your property. This point also ties in perfectly with the subsequent point, the prospective tenant. You should look to buy a property in a location that will be attractive to prospective tenants, and by this we mean:

  • Close to the town centre
  • Close to a Motorway Junction
  • Easy access to train & bus stations
  • Handy for supermarkets
  • Conveniently located for schools / universities

These facilities are what most tenants would look to be conveniently located for. However, It also needs to be:

  • Safe & Secure
  • Quiet
  • Nice & Clean Neighbourhood

It’s going to be difficult to match everyone of these however try and check off as many as you can. By doing so you’ll have a much better investment. If you wanted to invest in a property near where you live, yet that area doesn’t really have many facilities, it may be worth considering looking further afield. Make sure the local crime rate is low and that the overall area is a nice place to live, you’ll need to use your common sense, would you like to live there?

Prospective Tenant

When looking at buying a property you also need to look at who your potential tenants will be. If you buy your property in one of the cheapest areas around it may mean that you could have unreliable tenants. You need to think about who they are, what they do and what they need. If you’re buying a house near a school, then a family may be interested so you may need more than two bedrooms and a good-sized garden. If you’re looking at flats near universities in order to target students as tenants, you’ll need furnish it inexpensively and for it to be easy to clean. You can always tell what kind of people will be interested in renting your property by looking at the area and seeing who else rents property there. Have a chat with a local estate agent and ask what renting is like in the area, what kind of people are renting, and if there are many issues with tenants. It is important that you get good references for tenants and ask for a security deposit in advance so that you are protected against a default in rental payment or damage done to the property.

Maintenance

Maintenance is another great point and ties in with the previous one about tenants. You need to look at your property and establish what annual maintenance costs are likely to be. A property of substantial proportions and with a large garden is going to require more maintenance than an apartment. If you’re looking at a few different properties this needs to be considered as it may be worth deciding to go for a property that brings in a little less rent but where maintenance costs are low.

A new-build property is always a good choice to consider as not only is there normally no immediate maintenance required, but people love to rent a new house, so it could be let out quicker.

Price

Price again refers back to the first point of Net Yield and also the prospective tenant. If you’re buying a house at £140,000 you’re going to get a different kind of tenant than one renting a house that you’ve bought for £500,000, it’s a fact of life. In terms of referring to net yield, make sure that the yields are the same whatever the price of the property is. For example, if you buy a property for £250,000 which returns 5% and a property half the price returns a 6.5% yield, you may want to consider buying two cheaper properties.

Haggle! Unless you’re in a rush then make sure to haggle on the purchase price. We’ve known many entrepreneurs offer totally unrealistic offers and told us that they felt embarrassed making such low offers, yet like they said, the worst that can happen is a vendor just says “No”. When we refer to yield, this will be affected by the price you pay for a property, so negotiating hard to get as low a price as possible will increase your likely yield.

Time

How long will it take to rent out? This is a question that is going to be difficult to answer and if you talk to most estate agents they are unlikely to give you a straight answer. The following should be taken into consideration when looking to invest in a buy-to-let property that will let successfully and swiftly:

  • Do your research on location. The better the location, the greater the chance of finding a tenant
  • Check rental values in the area – see what other landlords are charging. Overcharge on rent and you may find a tenant, but it might take you four months to find one, which is four months’ rent lost, or 33% of that year’s income. Better to be competitive to ensure you get a tenant straight away.
  • Market the property to rent the moment you have exchanged contracts, don’t wait until you complete on the purchase. Set the date for tenants to move in as one week after you have bought the property to allow time to clean it and do any minor repairs. The owners of the property will allow your prospective tenants access if you ask politely. Remember, one week’s rent is 2% of your annual income.
  • See what property values in any area have done over the last five years. Those which have risen the most will confirm you are buying in a good area and are likely to continue to increase in value.
  • Check on availability of similar properties to rent. If there are 20 similar properties that are available to rent, you will struggle to find a tenant and also command a full rent. Establish, by talking to local letting agents, which sector of the rental market has a shortage of property to rent, and target those properties to buy.

Buy-to-let has been such a popular investment tool because it not only provides you with an immediate income, or return on your investment, through rent paid, but while the property market remains buoyant, you will also benefit from a rise in the value of the property. Recent government legislation is such that stamp duty has increased on any property you buy that is not your primary residence, and for higher rate tax payers, the tax relief on a buy-to-let mortgage has dropped to the base rate of 20%. However, you could always set up a company that makes renting out your property a business, and therefore you can take advantage of different and more beneficial tax legislation.

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