If you are thinking of starting a business or have already started one, you will need to consider how to manage your business finances. This page sets out the steps you need to take if you want to open a bank account or apply for external finance, for example a loan or business overdraft.
Open a business bank account
Your first step is to open a business bank account. You should always run the finances of your business through a business bank account not your personal bank account. A business bank account is also essential to securing external finance. You can find out more information about opening a business bank account here.
Applying for finance
Applying for any form of business finance requires a good amount of preparation. The more detailed information you are able to provide about your business’s finances, the more likely a lender or investor is to support your business. You need to make sure you can prove the viability of your business in the long-term.
Different types of finance will require different information to be provided or aspects of your business to be checked. This page sets out the most common things a lender or investor will look at when assessing a request for funding.
Business Plan
A business plan is essential to show the future direction of your business. It details your business strategy and key objectives, serving as a roadmap from your current position to meeting your business objectives in the future. This might include details about how you are planning to launch a new product or service, or expanding your existing offering.
A business plan encompasses essential elements like market analysis, financial projections, and the organisational structure of your business.
Financial institutions and investors will require a business plan before offering any funding. They will want to understand how you plan to use the finance you have requested. For example, whether it is for the purchase of or access to premises, equipment or stock or to help with cashflow. They will want to understand how the finance will benefit the business as well as how you plan to repay the finance.
For more information about business plans and how to write them visit the Application Help page.
Cash flow forecasts
One of the key indicators any lender or investor will look at when deciding if they can offer your business finance is its cash flow. Cash flow measures the amount of money entering and leaving your business over a specific period.
Positive cash flow occurs when more cash enters the business than exits, while negative cash flow indicates the opposite.
Regardless of whether you are looking for finance, it is a good idea to develop and maintain a cash flow forecast to help you anticipate any potential squeezes on the finances of your business in the future. Most businesses, even profitable ones, will experience periods of negative cash flow, whether it is through seasonality, disruption, or the need to pay staff and suppliers before you get paid. There are many different finance products available to support businesses with their cash flow, from overdrafts to invoice finance and other support.
The earlier you can identify potential cash flow issues the better chance you have of finding the support needed to ensure you can maintain the working capital needed for daily operations. A cash flow forecast will also enable you and any responsible lender to minimise the risk of your business not being able to meet any repayments.
Your business credit rating
Lenders will run a credit check on your business (or you personally if you are a sole trader or partnership) before agreeing to offer you a financial product.
A business credit score assesses a company's creditworthiness by evaluating various factors to determine its financial position and level of financial risk. Business credit scores range from 0 to 100, where a score of 0 indicates high risk and a score of 100 indicates low risk.
To enhance your business's credit score, you should strive to achieve a score as close to 100 as possible.
Your business financials
As well as looking at your cash flow forecast and business credit rating, lenders will want to understand your business and its current financial health. The most common way of assessing this is through the financial accounts.
Most businesses in the UK are legally required to file accounts with Companies House every year, even if they are dormant or not trading. The specific requirements can differ depending on the type of business, but the most common financial accounts are made up of a profit and loss account and a balance sheet.
A profit and loss account is, simply put, a statement of your income streams (revenue/sales) minus your costs, and shows if your company has been profitable or not over a specific period of time (usually the last financial year).
A balance sheet lists all your assets and liabilities as at the end of the last financial period. This will enable any potential lender to assess the value, or liquidity of your business at a particular moment in time.
Whilst the financial accounts are an important indicator of the current or historical financial health of a business, a lender will not necessarily base their decision to lend simply on whether a business has been profitable or not, or how valuable it is today. The majority of lenders will however want to understand where your business wants to be in the future and how it plans to get there, and therefore you may be asked for financial forecasts. This means that even a loss-making business with a solid plan to become profitable in the future may be able to access finance to help them achieve their goals.
Pitch decks
If you’re looking to secure angel or equity investment for your business you will also need to prepare a pitch deck. A pitch deck is a presentation to potential investors, that supports and highlights your business proposal.
Your pitch deck should include the following topics:
- Your product or service;
- The unique selling point of your product or service;
- The market and where you are positioning your business versus the competition;
- Your team;
- The financial request (including detailed plans for how you’ll use the investment);
- Your exit strategy.
You should support your pitch deck with evidence and insights, demonstrating your expertise and positioning your business as a credible investment opportunity to inspire investor confidence.
Support and advice
There is plenty of support and advice available for business owners at every stage of their business journey. Some of this is relevant to all businesses, for example managing finances. Some of it is relevant to certain sectors.
Some sources of support and advice include:
- Individual lenders all have small business support and advice sections on their web sites;
- The British Business Bank Finance Finder | British Business Bank;
- Business trade associations, for example the Federation of Small Businesses and Chambers of Commerce or sector specific associations such as the National Hair and Beauty Federation Setting up your own beauty business - National Hair & Beauty Federation and the British Beer and Pub Association Home | BBPA.
