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Financing Start-up Costs

Starting a business requires significant financial investment, and entrepreneurs can explore three main sources of funding: Capital, Commercial Loans, and Government Assistance. Capital typically comes from the owner's personal investment and varies based on the business structure. Commercial loans are available from banks to cover start-up costs, such as machinery, with repayment terms linked to the asset's lifespan. Additionally, the government offers grants, loans, and guarantees to support new and expanding businesses. Understanding these options is crucial for financial success.

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Financing Start-up Costs

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  1. Financing Start-up Costs Three main sources • Capital • Commercial loans • Government assistance

  2. Capital • The money invested in the business by the owner(s) • Is likely to be a substantial amount • Depends on the legal form of the business – • Sole trader / partnership depends on personal wealth • More money available for limited company as can make use of shareholders

  3. Capital • A public limited company can raise money through a stock market ‘float’ • A limited company can raise capital through a specialist venture capital company or through business angels

  4. Venture Capital company • Will invest in a limited company (public or private) through the purchase of shares • Will have conditions attached – such as a place on the board

  5. Business Angel • A picturesque term for a wealthy individual who invests in start-up and growth companies • In return they will accept shares or actively participate in the company • “Dragon’s Den”

  6. Commercial Loans • Start-up costs are often financed by commercial companies such as banks • Usually the length of the loan is set to match the expected life of the item or asset to be financed • An asset is an item owned by the business

  7. Common Loan Types • Bank business loan – • A fixed medium-term loan, typically 3-10 years • Covers the purchase of capital items such as machinery or equipment • Interest charge linked to Base Rate (centrally-set) • Repayments by instalments

  8. Common Loan Types • Commercial mortgage • Long-term borrowing to finance property purchase • Typically up to 80% value of property • Repayable over a period of up to 25 years • Premises are used as security

  9. Common Loan Types • Venture capital loans • Venture capital companies also invest money in the form of loans • May expect an element of control over the company • Possibly including having a director on the board • Will look for good sales and profit potential

  10. Private Loans • Possible to borrow from a private individual, e.g. family • Normally only occurs with small businesses – sole traders

  11. Government Assistance • The UK government, through the BERR (Department for Business, Enterprise and Regulatory Reform) provides grants and loans to new and expanding businesses • This Selective Finance for Investment in England (SFIE) is aimed at businesses operating in Assisted Areas • Information is available through Business Link offices and the BERR website

  12. Government Assistance • Smallfirms loan guarantee – government guarantee of commercial borrowing • Enterprise Capital Funds – provides share capital finance for small growth-orientated businesses • The Small Business Research Initiative • Local Business Partnerships • Business Bridge • Young Enterprise

  13. Other • Chambers of Commerce • Trade Associations • Prince’s Trust • Shell Livewire • Federation of Small Businesses • The Business Club

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