Getting enough money together to properly finance a start-up business is difficult in any environment. In the current environment, it is even more so. Getting enough of the right type of finance together will be one of the most difficult tasks you will face as a new business start-up.
Typically, start-ups will use a number of sources of money to fund operations:
- Own savings or friends and/or family money,
- Grant aid if available,
- Bank loans and
- Credit from suppliers
The last two sources are limited in reality in the current environment. Typically, sources of finance are broken down into two main types – equity and debt.
Equity is the technical name for the money you invest in your own business. It usually comes from the business owners’ savings or resources and is not repayable until the business closes down or is sold. If you put your own money into the business, you should be aware that this money is exposed to the highest risk. In the event of the business getting into financial difficulty, all other monies are paid back before equity.
It is important for you to raise as much as you can from your own resources, as most banks will look at a ‘matching funds’ basis before lending to a business. In the event of raising a bank loan, it is likely that the bank will invest no more than you do.
Debt is the money loaned to the business. It can be from friends, family or from financial institutions. It is usually repayable at specified dates and may require you to pay more back than loaned to the business in the form of interest. In reality, the business owner is less likely to lend his own business money as other investors, such as banks, prefer to see the owners’ investment as equity as it is more permanent.
In addition to the above sources of finance, some start-ups may qualify for grant aid (perhaps from the Galway County and City Enterprise Board) depending on their activities. Increasingly grant aid will include an element that is repayable – making this investment behave as a debt.
Regardless of what type of finance you opt for, your initial investment in the business must be enough to carry the business for a reasonable time until money coming into the business is greater than money being paid out. In addition to equipment and hiring people, you will need enough finance in place to cover the cost of operating until sales generate enough cash to cover costs.
For more information on this and other start-up topics, contact the Galway County & City Enterprise Board on 091-565269 or log on to www.galwayenterprise.ie. See our calendar of events for forthcoming SME week in October, including workshops, roadshows and networking seminars.