How much finance do you need?
Before you start a business it is vital to carefully work out how much finance you will need to make it a successful venture.
It is important to be realistic and honest when approaching an external lender and to show you have considered all of the potential costs.
Here are five top tips to help you achieve lending application success.
1. Establish what you’ll use the finance for. Before you apply for lending make sure you are clear on what it is you will use the finance for, as this will ultimately affect how much you need. For example, will it be used to buy equipment, supplies, property, or vehicles? Consider the initial outlay and the likely running/operating costs.
2. Work out your overheads. It is important to consider the relatively small expenses that can mount up as well as the costs directly related to your business. For example, if you decide to run your business from your home it is likely your house bills will go up, so this will need to be taken into account. Other overheads to consider are book-keeping and computer software; professional services like accountancy or solicitors; company registration; marketing costs; stationary and insurance. Overheads should be split in to immediate and ongoing.
3. Think about various sources of finance. There is a range of sources of finance available to start-ups. It is important that you research what is the best option for you and your business. Further information on the options can be found here. In addition to external funding you should look at what finance you already have, whether you will be using your own funds or friends and families. Lenders will look at your business plan and lending application to check that you will be able to pay back your loan in all eventualities. You should be clear about what you would use as collateral and who would act as a guarantor, if your circumstances changed.
4. Consider your tax. Based on your projected sales and growth in your business plan, research your potential levels of direct and indirect tax (like income tax and VAT). For example, if your annual sales are over £73,000 you are through the VAT threshold, which means you will need to be VAT-registered and pay a regular fee. Your level of tax will also depend on your business status, so whether you are a sole trader, partnership or limited company. You can talk through these sorts of issues with a business mentor.
5. Think about the timing. The structure of your business and your business cycle will affect when you might need additional finance. You should look at your suppliers and buyers, reviewing when money will be coming in and leaving your business. This will help you work out what funding you need and when would be the right time for your business to take in external finance.
