When starting your own business for the first time, one of the very first decisions that you’ll have to make is how you’re going to get access to the initial burst of capital necessary to start and grow a company.
You might need money to pay for start-up costs such as buying office equipment, or for the ongoing costs of business such as rent or telephone bills.
Unless you are already a person of independent means, this decision is likely to come down to one of two choices: whether to get a loan, or whether to get people to invest in your business.
You can get loans from financial investors or from friends and family.
Either way you’ll need a fully-thought out business plan to present, together with a timetable for paying back the money.
If you’re attempting to get finance from friends and family, your first try should always be for the interest-free loan. As well as not having to pay back any more than you have borrowed in the first instance (a problem with all other types of loan), this has the advantage of having the fewest tax implications.
Your contacts may, however, want some return on their money. If this is the case, then you should always make sure that any agreement for the loan is entered into in writing. This way, both parties will know where they stand should there later be any problems.
Your loan agreement should include such issues as how long the loan is for, when it will be repaid and under what circumstances and what rates of interest apply to the loan.
If you decide to take a loan from a business lender, then check to see that you’re getting a good deal on the interest rate.
Price comparison websites can be an excellent place to look, as they’ll help you to find the best deal on your loan.
Business lenders will often need security on their capital, so consider carefully what you’ll be putting in place should you for any reason be unable to repay the full amount.
As an alternative to a loan, you may instead want to offer any potential partners a share in the business itself. Be careful not to dilute your own shareholding too much if you take this route, though. You’ll ideally want to keep at least 70% of the business in your own hands.
Any money invested in the business by a partner should be considered as risk capital and you’ll need to make it clear to those involved that there is a possibility that they may not receive all of their money back.
If, on the other hand, the business does extremely well, then the investors’ return should be sure to compensate for the degree of risk that their money was put at.
Investors may also bring extra knowledge or contacts into the company and the fact that they have committed their money directly to the company itself means that they will have a direct interest in helping it succeed.
Both ways of raising money have their pros and cons, but each will bring an influx of capital into your business that will help you to move forwards.
This is a guest post from moneysupermarket.com
If you borrow from investors you always run the risk of being sued…that is happening to friends of mine.