Personal savings are
probably the easiest and most cost-effective way to provide your own funding
for a new business, this is because you do not have to repay anything. However,
this can be risky, and you may not have enough money to cover all the funding
you need. You could also consider:
a mortgage – or a second mortgage.
money from your parents.
your personal belongings.
don’t have to worry about paying back bank debts or overdrafts, with overdrafts
the bank can make you pay back the money you borrow whenever they want and this
could cause issues to your funding.
will have full owner ship over the company and will get 100% of the profit
using your own money to fund your business you reduce the amount of money you
can use for luxuries and other needs, this means that you may have to make
reductions on certain things like buying a cheaper car and downgrading to a
your business takes a turn for the worse and you have to close it down, you may
have to sell your car and even sell your house.
starting your own business you will have to make your own contacts and
mentoring, this is a lot more difficult because investors will usually set this
up for you.
of funding 2: Bank loan
A bank loan would be one
of the more obvious choices since it is probably the easiest way to borrow
money, you can borrow money over a short or long term period.
Disadvantages of bank loans are:
a bank loan you have to pay APR (Annual Percentage Rate) this means that you
will have to pay money on top of the amount you take out. So say the APR is
4.1% then you will have to pay the annual interest rate as well as the fees for
your loan, The 4.1% APR is fixed meaning that you will only pay 4.1% even if
the APR changes over time. For example if you took out a loan of 20,000 over a
term of 60 months (5 years) with an APR of 6.8%, you would pay back 392.23
every month for the 60 months and repay a total of 23,533.80.With banks you can
choose from two years up to 5 years to pay back the loan, paying back a fixed
price every month.
If you take out £20,000, the amount can
change over the period you take it out for, no matter what the APR is you will
pay more for borrowing the money for longer. So, if you borrow £20,000 over the
course of two years with an APR of 6.8%, you will pay back £891.80 a month and
pay a total of £21,403.20, however if you take out £20,000 over the course
of five years, with the same APR then you will pay back £392.23 a month
and pay a total of £23,533.80. This means that by borrowing
for a longer period you pay back around £2,130 more than you would when
borrowing for a shorter period.
Advantages of bank loans are:
The period of time you choose to pay
back your debts is fixed, meaning that the bank aren’t able to make you pay it
back on demand (unless you breach the terms and conditions of the loan)
Even though you must pay APR on your
loan you do not have to give any of your profit to the lender.
of funding 3: Bank overdraft
A Bank overdraft is also
quite an obvious source of funding since the bank is usually the first place
people look to get money. A bank overdraft is when the bank allows you to spend
more money than the bank account actually has, however the money that you use
must be returned to the bank and usually at a high interest rate.
Disadvantages of Bank overdrafts:
can demand for the money back at any time, this can be bad because you may not
have the money to pay it back or may have not reached a stable point in your
business where you can afford to pay it back.
you want to extend the period of your overdraft then you will have to pay a fee.
you do not arrange an extension to your overdraft and you exceed the limit then
you will be charged.
Advantages of Bank overdrafts
can be useful for smaller businesses because they can use the overdraft to help
them with getting enough money to start up their business
is fast and easy to arrange, this means that they can use the overdraft
whenever they need.
is more flexible than a loan in the sense that if you want to borrow £3,000
then you can, but with a loan you can usually only borrow a minimum of £10,000.
Source of funding 4: Venture capitalists
capitalists are a less obvious source of funding. Venture capital funding is a
type of private equity investment, this means that they will give you funding
over a long term at the cost of a share of the business. Venture capitalist funding
is usually for businesses that want help starting up, and if the venture
capitalists thinks that the business will be successful then they will invest
in the business. An example of a venture capitalist is the television show ‘The