Start-up financing

Finding enough money to start a business can be difficult. The first and most important step is to figure out how much you really need and that requires clear thinking and awareness. The spreadsheets mentioned in the cashflow article can help, but you also have to make some realistic estimates on how long it will be before your income is likely to exceed your expenses. Hopefully these articles will help, but you should also talk to people in similar fields and locations (the cibnet forum is intended to help you do this). But even after seeking out as much advice as possible, however long you think it’s going to take; double it. One of the most common reasons for start-up business failure is the lack of initial stage finance.

Break-even periods can vary hugely depending on how large you intend your business to be, how lucky you are, how well you market yourself, how much you spend on overheads and dozens of other circumstances, many beyond your control. There are plenty of stories of instant success and school-leavers with good ideas being showered with money, but remember that the people who struggle for years tend not to shout about it.

A few possible startup scenarios:

As a solo creative you work from home while building up enough quality work to attract some well-heeled clients. You spend the best part of a year creating an asset – writing a book, building a portfolio, submitting work to competitions, recording songs, writing a screenplay or shooting a short film, while at the same time having to reach out to potential customers or maybe just work hard to put the plans together to find some serious finance partners. So that’s a year of living expenses, rent or mortgage, food and utilities. The best and most likely source of finance for this might be parents, partner, friends, savings or even a full time job. One thing’s for sure, it isn’t going to be a bank.

“A bank will only lend you money if you can prove you don’t need it.” ~ Bob Hope

If you can show you have assets far in excess of what you want to borrow, a bank might – just might – furnish you with the funds and let you pay them for the privilege. And if you can’t pay them back, they’ll take that asset and sell it as quickly as possible. Don’t blame them, they are in business too; the business of making money by borrowing from one source at as low a rate as possible and lending to someone else at as high a rate as possible. Their profit margin is small so they can’t afford to take unnecessary risks and nothing looks riskier to them than a creative with a dream and no business experience.

If you and three or four friends decide to start up on your own, rent a low-cost working space, pool your collective work and contacts and build a company with a snazzy logo and an assistant or two, expect to cover the first eighteen months of running costs. However you raise the money to do this, don’t expect to start repaying the loan/investment for at least the first two years. This is not a ‘back of an envelope’ exercise, this is a venture that will require some very careful financial management and that requires a very clear and detailed understanding of what will be involved. Spreadsheets for forecasting and cashflow management are crucial.

If your idea will cost more than a large luxury house to develop and take to market, then you’ll need to raise money in the marketplace. You may be seeking venture capital or even setting up a company flotation. Even then you’ll need some finance to get you from zero to fully funded. That’s where Angel Investors come in. Angels come in all shapes and sizes. They will often be successful business people who have a good understanding of what it takes to get a business off the ground and are keen to see others succeed. One important thing to bear in mind if you have an angel investor, make sure s/he understands your business and spend a significant amount of time keeping them informed about progress. If you don’t, you’ll find out that even angel investors suffer nerves, and when they lose confidence things get dicey. No matter how well things are going, a jittery investor can pull the plug.

Whichever type of business you want to enter, one of the best sources of finance are the clients themselves. It’s entirely possible to start a business based around a contract with an enlightened and trusting client who is prepared to pay a significant percentage of the contract in advance and make regular payments as the job advances. Of course, once the job is delivered you’ll need another client pretty quick, so you have to divert some of your energy into seeking out new business before the first job comes to an end.

There’s a lot more to say about raising finance, so keep an eye out for later articles.

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