Often the hardest part of starting a business is raising the money to get going. The entrepreneur
might have a great idea and clear idea of how to turn it into a successful business. However, if
sufficient finance can’t be raised, it is unlikely that the business will get off the ground.
Raising finance for start-up requires careful planning. The entrepreneur needs to decide:
How much finance is required?
When and how long the finance is needed for?
What security (if any) can be provided?
Whether the entrepreneur is prepared to give up some control (ownership) of the start-up
in return for investment?
The finance needs of a start-up should take account of these key areas:
Set-up costs (the costs that are incurred before the business starts to trade)
Starting investment in capacity (the fixed assets that the business needs before it can
begin to trade)
Working capital (the stocks needed by the business –e.g. r raw materials + allowance for
amounts that will be owed by customers once sales begin)
Growth and development (e.g. extra investment in capacity)
One way of categorising the sources of finance for a start-up is to divide them into sources which
are from within the business (internal) and from outside providers (external).
The main internal sources of finance for a start-up are as follows:
These are the most important sources of finance for a start-up, and we deal with them in more
detail in a later section.
This is the cash that is generated by the business when it trades profitably – another important
source of finance for any business, large or small.
Note that retained profits can generate cash the moment trading has begun. For example, a
start-up sells the first batch of stock for £5,000 cash which it had bought for £2,000. That means
that retained profits are £3,000 which can be used to finance further expansion or to pay for other
trading costs and expenses.
Share capital – invested by the founder
The founding entrepreneur (/s) may decide to invest in the share capital of a company, founded
for the purpose of forming the start-up. This is a common method of financing a start-up. The
founder provides all the share capital of the company, retaining 100% control over the business.