Finance is arguably the greatest challenge when it comes to setting up a business and it has only become harder since the financial crisis hit.
However, the UK government has identified the important role small businesses play in the economy and has made attempts to make the funding arena much more open to budding entrepreneurs with a strong product or service to offer.
But what’s options do people have when they need cash to get their business up off the ground?
Government schemes: Start-Up Loans and the New Enterprise Allowance
Researching government schemes should be the first step for those looking to branch out on their own. The two main ones are Start-Up Loans and the New Enterprise Allowance.
Start-Up Loans
The government established the Start-Up Loans Company after Lord Young identified that if entrepreneurialism was as entrenched into the British mentality as it is in the US, there could be a further 900,000 jobs created.
It is now fronted by former Dragon’s Den participant James Caan and is designed to give mentoring and unsecured soft loans from £2,500 to £20,000. The money is given to controlling principals or shareholders in the business, which is typically one to three individuals.
This is hoped to help entrepreneurs with no track record – therefore unable to access cash through traditional means – secure finance.
However, the scheme has come under criticism recently. The Chartered Institute for Securities and Investment claims the finance has a skewed risk-reward ratio in the borrower’s favour. While a financier provides soft-loan capital, its return is priced at only three per cent over base rate and there is a capital repayment holiday for 12 months.
New Enterprise Allowance
This is designed to give money and support to those on benefits that want to start their own business.
To be eligible, an applicant must be 18 or over, have a business idea and on either Jobseekers Allowance, Income Support as a lone parent, or Employment and Support Allowance while in a work-related activity group.
Bank loans
Getting a bank loan might be tricky but it’s still possible, especially since the government introduced the Funding for Lending initiative.
Applicants must demonstrate that there is a market for their idea, give realistic cash flow forecasts and prove that they will be able to pay back the loan with interest. People can consult accountancy experts on this to ensure their proposal is as sound as possible.
Banks could ask an applicant to provide security against a loan, such as a house or car. Therefore, individuals should think about how much risk they are willing to take on before going down this road.
Selling shares
Another way to raise cash is to sell shares in the business idea itself. These stakeholders can be friends, family, or other entrepreneurs.
There are also equity funding options available, such as investment from wealthy individuals, venture companies or crowdfunding.
Of course, this may prove harder than securing other forms of finance. Convincing non-lenders to put cash in a project is a challenge and comes with lots of legalities that must be sorted out before any money changes hands.
I am a chartered tax advisor with a specialism in the freelance contractor sector advising contractors on how to structure their affairs and recruitment businesses and end hirers on the effective…
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