How to finance a startup

In the current economic climate, startups need all the financial support they can get

Life has never been tougher for new businesses. But if you are considering a new venture or have a great idea you would like to turn into a company and you can create a tech startup in the current climate, you will definitely thrive in the good times. Despite the downturn, there are still plenty of options to help find the funds you will need to succeed.

The first steps are to develop a business plan and a forecast model. These are key tools that document your ambition for the business, your competitive position and your market proposition. The forecasting model is your view of key financial inputs and outputs and also documents the assumptions you are making about market size and conditions, and what you expect to achieve within specific time frames. It will also stop you becoming distracted by unrelated areas and non-commercial activities.

The model also shows cashflow, which will yield your funding requirement. Too many businesses arrive at a random number –­ £1.5m, £3m and £5m are the amounts I most commonly hear ­ – which they try to justify. A proper model will often surprise you as to how little you need, especially as you flex some of the elements to reflect your best and worst-case market response.

Too many technology businesses believe their cashflow difficulties arise from being ahead of their market and if they could only get access to bridging cash, the revenue would emerge. Although legendary stories about garage startups such as HP and Google abound, the reality for most businesses is that a lack of connection with their target markets will not result in open-armed acceptance –­ and certainly will not endear them to potential investors.

So what are the funding options for technology entrepreneurs looking to start a business?

Banks
Government intervention has increased liquidity and banks are open for business, but the cost of borrowing has increased. Banks are trying to pay back governme nt loans, and credit committees within banks are being conservative, especially with new businesses.

For the best chance of receiving finance:

• develop a good business plan and bring in a team with a track record of delivering against forecasts in other businesses;

• make regular contact with your bank manager to develop a good working relationship; and

• keep your business plan up to date to fit the rapidly changing business environment.

If you have contracts for supply, you might want to explore specialist lenders as well.

Government initiatives
There are well-publicised government initiatives designed to help small businesses. These are normally business loans and are tailored to the firm so they can be fixed rate, variable or “mezzanine” –­ in a mezzanine loan, part of the interest due is deferred until the end of the loan term.

The Enterprise Finance Guarantee (EFG) has been promoted heavily by banks and the government as a way of funding small business growth, from startup through to expansion. The government will underwrite 75 per cent of the loan value. To qualify:

• your turnover cannot exceed £25m;

• the business must have insufficient assets to secure a normal bank loan;

• you will need a strong business plan; and

• you must be looking to borrow between £10,000 and £1m, with higher minimums for partnerships and sole traders.

Each bank implements the EFG in a slightly different way, so shop around as attitudes to risk and preference for specific industries vary. A premium will have to be paid to the government each month to insure against their risk. In addition, the loan will probably have to be mitigated with directors’ personal guarantees.

Businesses considering technology research and development (R&D) investment should look at the UK government’s R&D tax scheme. This allows for up to 175 per cent of the associated R&D employment, and some of the consumables, costs to be offset against tax. For companies where profits are low or unrealised, HM Revenue & Customs will make cash payments at a lower rate instead.

Seek specialist advice to ensure your claim is properly structured and that appropriate expenses for activity have been included.

Grants
The government operates a number of EU grants that encourage venturing with universities. The EU Framework Programme will fund research collaboration within the newly defined European Research Area for businesses that turn over less than €50m (£45m).

Regional Development Agencies are funded by six government departments and have cash set aside for investment and regeneration. There are also special funds for assisted areas so consider that possibility when deciding where to base yourself.

Business investment grants are available for plant, machinery and buildings as well as R&D, including costs of testing and protection of intellectual property.

The UK Council for Employment and Skills is funded to support retraining and cross-training, so cash might be available to help you expand or adapt your workforce.