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Q&A with Richard Bearman: How to fund your new business

Richard Bearman, UK Director Small Businesses HSBC, on common sources of start-up funding

Raising enough money to start a new business can be a challenge. Here, Richard Bearman, UK Director Small Businesses HSBC, talks though the main options and why it’s wise to mix and match them.

Should new businesses minimise their start-up costs?

Richard Bearman (RB): “Yes, because the less you spend, the easier it will be to pay them off and start to make a profit. You should only buy something if there’s a sound business reason. Where possible, use what you have, borrow, swap skills and buy used rather than new. The lower your costs, the less funding you’ll require and the less debt you’ll need to take on. However, be aware that scrimping in some areas could hamper your chances of success.”

Is it important to work out how much is needed to start up?

RB: “Yes and very early on. You must consider all costs, although there could be some unexpected costs, so build in some contingency. Once you know how much you need to start your business, you can think about whether you’ll make enough sales. If not, you’ll need to rethink your business idea, because it’s not viable. You don’t need an overly sophisticated cash flow forecast, just something that allows you to test your business idea. At that point, you also need to decide where the money will come from to start your business.”

Are people likely to have to invest their own money?

RB: “Most people do, and some investors and lenders will expect to see that you’ve invested your own money. Using your own cash means no interest or having to give away equity [a share in the business]. But, investing all of your own money will mean you won’t have any should you later suddenly run out and need more cash. A key point I’d like to make is that your start-up funding should come from a blend sources, not just one or two. Keep some of your own money back, if possible, and explore other options. Use the most cost-effective one for whatever you’re buying.”

What about investment from friends and family?

RB: “It’s another common source of start-up funding, and could be part of your blend. But they should be aware of the risk, the business might not work out, and you both should consider the consequences if that happens and they lose their money. I recommend you create a formal agreement that sets out the terms, then everyone knows where they stand.”

What about start-up grants and loans?

RB: “There are grants available from public-sector organisations, but they tend to be for certain regions, sectors, people or purposes, for example, to sell overseas. The grant process can be a long one, the criteria can be strict and your application might not prove successful. Businesses can benefit from Regional Growth Fund programmes and the Start Up Loans Company is another option. It’s a government-backed scheme that enables new businesses to borrow up to £25,000 for a lower, fixed interest rate.”

Does HSBC provide funding to start-ups?

RB: “Of course, we approve 91% of all lending applications from our small-business customers, and many are start-ups. Our overdrafts can provide customers with working capital – we’ve removed fees to make that easier and cheaper. Alternatively, a customer might apply for a loan to start a business. Obviously, we carry out checks on those who don’t already bank with us. And if you need less than £10,000, normally we don’t normally ask for personal guarantees. We don’t insist on a business plan in every case either but in truth a business plan should be written for the business not for the bank. At very least you should have crunched the numbers to prove that the business is viable, on paper, at least.”

What about loading debt onto a credit card to start a business?

RB: “I wouldn’t recommend it. Unless you pay it back quickly, you’ll pay a lot of interest, when other options could well prove much cheaper. You need to match the type of funding to what you’re buying. Making bad choices will mean you’re unnecessarily loading debt and risk onto your new business. Make good use of credit card interest-free periods for cash flow when running your business, sure, but it won’t be the cheapest option in other cases.”

What are your key start-up funding tips?

RB: “Think in terms of finding a blend of funding solutions, not just one. To minimise cost, each one should be appropriate for what you’re buying. When it comes to investors, remember that they’re investing in you as well as your business; so, your energy, passion and credibility must shine through. And make sure your numbers add up when asking others for funding or investment.”

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