Having decided which business structure is right for you, another key consideration is how to fund your business.
It is a truism that cash is king in a business and ensuring you have enough funds to do what you want to do is key to surviving and thriving.
There are lots of different names and terminology given to funding but there are only 3 ways to fund a business – and only 2 of those are available on day 1 – most businesses use a mixture of all of them. Understanding each and when/why you might use them can be really useful. The 3 are:
This describes funding from the owners of the business – so in the case of a limited company the shareholders. It is what they have put into a business in return for the proportion of the company that they own – whether that is 1% or 100%.
If you invest share capital, it remains “in use” by the business unless you sell your shares or the company closes. It may be that you are able to receive a payment of dividends from the company however on an ongoing basis, in return for the investment.
This describes any money that the business has borrowed. This may well be from a bank or other institution that lend money, but it can also be from the Directors of the business in the form of a Directors loan.
Typically borrowing from banks and financial institutions will require the business to make regular repayments and interest payments as well. Keep an eye out for the need for personal guarantees from you as the owner of the business that are often required initially – particularly for start-ups and smaller businesses. They give the banks a fall back if the business is unable to meet repayments.
Director’s loans can be a great way to help get a business started, because unlike the share capital the Director can then easily take repayment of the loan when the business can afford to do that.
This is not available when you first set out in business because it requires you to have traded and made a profit – so the end of your first year is usually when this becomes a viable option. Any profit made by a business, after all costs and taxes have been accounted for, can either be returned to the owners in the form of a dividend and/or retained to enable growth and create more value. This can be a really flexible way to fund business growth.
All 3 sources of funding offer different pros and cons. The challenge is to identify how much you will need and how best to structure the funding!
If you have an accountant, they should be your first stop for business advice. If you don’t have an accountant or they can’t help, BuBul has a wide range of experts available. For more advice on business funding, contact our expert* Martin on LinkedIn.
*We’ve picked experts we know and trust who are good at what they do. All of them will give you at least an extra 30 minutes free advice if you contact them and would then charge their normal prices. They don’t pay to be on BuBul and don’t give us any money from anything they earn as an expert.