Making Business Finance Guide Work for You

Starting a new business often requires capital – money that is used to help research your business idea, create a prototype product, or purchase equipment or machinery that your new business will use.

Starting a new venture can be thrilling – yet also financially challenging for new business owners.

Often, the first hurdle that budding entrepreneurs face is securing the necessary funds to breathe life into their business dream.

There are many reasons a start-up requires initial funding, such as:

• Research and development: understanding the market and potential customers is important. Funding can be used for conducting market studies, surveys, and tests that offer insights into the viability of your business idea
• Prototyping: for product-based businesses, creating an initial version or prototype can require significant resources, from materials to machinery or even software development tools
• Inventory and stock: retailers and manufacturers might need initial capital to purchase stock or raw materials, ensuring they’re ready to meet customer demand
• Operational expenses: rent for a physical location, utilities, initial salaries for essential staff, and setting up a functional workspace can require a substantial upfront investment
• Marketing and branding: building awareness can be important for any new business, such as funding marketing campaigns, creating a brand identity, and establishing an online presence
• Licences and insurance: complying with regulations can mean securing certain licenses or buying required insurance, such as food safety or public liability insurance
• Contingency: a financial safety net can be invaluable during unforeseen challenges when starting up to ensure that you don’t run out of cash.

Many new business owners use their personal savings or money provided by friends or family.
You might also investigate additional sources of funding, and this is generally known as the pre-seed capital.

Pre-seed capital

It is provided to business owners looking to expand on an initial business idea or concept.

It is often used for activities such as conducting market research and creating prototypes or minimum viable products (MVPs).

Pre-seed funding often comes from a business owner’s personal savings as well as from friends or family members.
Find out more about pre-seed capital.

Pre-seed capital is the earliest stage of funding needed to start a business.

• It is provided to business owners looking to expand on an initial business idea or concept.
• It is often used for activities such as conducting market research and creating prototypes or minimum viable products (MVPs).
• Pre-seed funding often comes from a business owner’s personal savings as well as from friends or family members

Debt finance

This involves a business borrowing an amount of money or purchasing an asset with finance that is paid back with interest over an agreed period of time.

Common forms of debt finance include:

Loans

Business loans are usually offered by a range of providers – from high street banks to specialist business lenders – and may be secured or unsecured.

• Secured loans use assets your business owns – such as property or machinery and stock as security
• Unsecured loans can be borrowed without using any assets as security. As a result, unsecured loans typically have higher interest rates than secured loans as they are riskier than secured lending.

Lenders typically look for businesses with a trading history and a proven track record.

This means that early-stage start-ups may struggle to get a loan.

If that’s the case a founder may want to consider a Start Up Loan which can cater to those who have been turned down for finance elsewhere.

There are also some lenders, such as Development Finance Institutions (DFIs), that consider applications from businesses with limited assets, trading histories or track records.

Overdrafts

An overdraft is a line of credit on your business bank account that provides access to more short-term funding than your business’s own capital.

Unlike loans which have a fixed repayment fee, you only pay interest on the amount you’re overdrawn.

However, the bank will usually charge a fee for arranging the overdraft, and if you’re late or miss a repayment, you’ll be charged a fee that could affect your credit rating.

Overdrafts generally have a higher interest rate than business loans.

Equity Finance

Angel investment

Angel investors are often established entrepreneurs or people with extensive business experience who use their own money in exchange for an equity stake in your business.

This means that in exchange for investing their money in your start-up, they will own a percentage of your business.

As well as funding, angel investors can provide valuable business guidance and access to a network of connections that may also prove very valuable.

It’s typical for an angel investor to want some input into the business’s decision making so a founder should be prepared for this.

Equity crowdfunding

This involves listing your business on an online platform that allows investors and members of the public to buy shares in your business.

There are various equity crowdfunding platforms.

They allow you to reach people who might otherwise not have known about your business, but there’s no guarantee of success and platforms often charge a success and listing fee.

Some Countries offer tax relief incentives to crowdfunding investors.

Mezzanine finance

This is a hybrid form of funding that blends debt and equity finance.

A funder offers a business a loan which the business agrees to repay with interest.

However, should the business be unable to meet the repayments, the debt could be converted into shares in the company.

It’s generally used for larger funds than those required by a smaller start-up business.

Businesses selling goods or services overseas face risks when it comes to cash flow and receiving payment from buyers.

While the global market could offer immense potential, navigating the intricacies of importing and exporting can be a complex and expensive venture.

Proper funding can help ensure that your business can handle the logistical and regulatory challenges, as well as lay the foundation for overseas expansion such as:

Initial stocking:

Importing often involves buying in bulk to achieve economies of scale.

Customs duties and taxes:

Importing goods can attract customs duties and taxes, and costs can vary by country and product.

Shipping costs:

Transporting goods across borders, be it by sea, air, or land, incurs significant costs, especially when dealing with large quantities or delicate items.

Compliance:

Different countries have diverse regulations concerning product standards, safety, and quality, which can be costly to ensure compliance.

Insurance:

The international transit of goods carries risks such as damage, theft, or loss, making insurance an essential cost.

Local representation:

Establishing local offices, warehouses, or hiring representatives in the target country can streamline operations but may require financial outlay.

Currency fluctuations:

Currency value can fluctuate, potentially impacting profits – having a buffer can help navigate these financial ebbs and flows.

There are various finance products that can support exporting goods and services.

Trade (or export) finance

Trade finance provides guarantees and advance payments.
Products include:

Letters of credit

A legally binding guarantee from a bank that a seller of goods will receive payment from a buyer if the goods or services are delivered on time.

Export credit insurance:

An insurance policy that protects an exporter from not receiving payment from the buyer.

Bonds:

This provides a guarantee to the importer should the exporter not meet the obligations of the contract.

Supply chain finance:

This type of finance helps businesses manage their working capital. It involves a supplier receiving early payment of an invoice by a finance company. The business that has purchased the goods or service then pays the funder once the invoice is due.

Country Specific Trade Incentives

(UK as example below)

UK Export Finance (UKEF)) General Export Facility:

UKEF is the UK government’s export credit agency – find out more about UKEF. The General Export Facility (GEF) provides partial guarantees to banks to help UK exporters gain access to trade finance facilities. This allows businesses to unlock working capital to support business growth without the need for a specific export contract. Businesses can use the funding to cover everyday costs linked to exporting. GEF allows exporters to access cash facilities such as trade loans, and contingent obligation facilities such as bonding and letter of credit lines.

UKEF Bond Support Scheme:

If your business wins an export contract, you might need to provide a bond. A bond can often be provided by the exporter’s bank, although collateral is usually required which can put pressure on the exporter’s cash flow or working capital. To deal with this, the UKEF Bond Support Scheme provides a guarantee of up to 80% of the value of the bond.

If you have multiple loans or lines of credit, you may decide to consolidate the debts into a single, more manageable loan.

You could combine loans from several different providers into a single debt from one lender.

This process could result in a reduction in monthly repayments, and if your credit score has improved since applying for finance, you might also be able to obtain a lower interest rate.

On the other hand, debt consolidation can involve extra fees, and you may end up paying a higher interest rate if your credit score is too low.

In addition, missing repayments on a debt consolidation loan could significantly lower your credit score, and you may be charged additional fees.

The types of loans that can be consolidated include:

Secured loans

For this type of loan, you’ll need to offer collateral, such as property, vehicle, land, machinery or another major asset that your business owns, as security against the amount you want to borrow.

Due to the lower risk for the lender, secured loans are generally cheaper than unsecured loans.

However, applications for secured loans can take longer to be approved, and if you fail to meet the monthly repayments, the lender can reclaim their debt from the asset you’ve put forward as security.

Commercial mortgages

This is a loan that involves paying a deposit followed by monthly repayments with variable or fixed interest rates.

Commercial mortgages usually run for between one and 30 years.

The types of commercial mortgages are:

Owner-occupied mortgages

For businesses buying a property for commercial purposes.

Commercial buy-to-let mortgages

For businesses intending to rent the property to another business.

To get a commercial mortgage, businesses usually need to provide accounts for at least the past three years and projected trading figures for the future.

Worth knowing

If you have multiple loans, you might be able to consolidate the debts into a single, more manageable loan. This could result in lower repayments and lower interest.

Trust, stability, and accuracy were essential but important 100 years ago. Now, everyone takes those characteristics for granted, always needing a reliable way to get around.

If bank sells loans or deposits, our role is to figure out what is so special about their loans or deposits offerings. If nothing is special, increasing the bank market share might be difficult unless we suggest options for consideration, based on our market knowledge.

Creating a Unique Bank Brand Value Proposition

At Fundify Capital Investment make it our duty to understand the bank’s desired brand positioning and target audience to create a compelling value proposition.

The two important parts here are that it is not about defining your current brand position or your current customer needs but where you want to take the bank. Your value proposition should speak to the needs of your target market and explain something unique about your bank or culture. Once brainstormed, then go back and refine your brand value proposition so it is clear, concise, and memorable.

Great bank brand propositions solve everyday problems and stick in their customers’ heads to become different to another bank’s brand. Brand value propositions can take many forms, from describing attributes about a product (Like Netflix’s – “Watch Anywhere. Cancel Anytime.”) to more aspirational.