THE ESSENTIALS FOR STARTING A BUSINESS

Financial support is a key requirement at the start-up phase of any business Linda Pearson outlines how, where and what's required to achieve this finance.

All entrepreneurs have to overcome hurdles when it comes to finding capital for their new business. It’s important that entrepreneurs broaden their horizons when seeking funding to include the many various options out there until they find a financial package that best suits their needs. Preparation of a comprehensive business plan is another essential component of starting up a business. A well-prepared plan can be key to securing funding at an early stage and is vital to help you manage business more effectively. Locating an investor can take time. They can be located through bank managers, accountants, family, stockbrokers and other advisors.

CRUCIAL ROLE OF A BUSINESS PLAN

Without a plan, a business is essentially without guidance, and day-to-day activities are likely to be hairy and uncertain, in stark contrast to those businesses implementing a well thought out business plan. To stimulate interest from the reader or investor, the business plan must be researched thoroughly, explained clearly, and financially robust. A well-prepared business plan addresses a broad range of issues that investors will be interested in and does not focus on just ‘the product’. A competent business plan will show investors that you have confidence in your endeavor and have considered future scenarios. In their guide for entrepreneurs when dealing with investors, Dublin Business Innovation Centre observes that preparing a satisfactory business plan is an arduous but fundamental exercise.

The ‘Dealing With Investors’ guide explains to entrepreneurs that compiling a business plan forces you to understand what you want to do, and how and when you can do it. It details that a wellprepared business plan can form the basis for an investment deal.

Some reasons why a business plan is important is because in the process it can help you research the market thoroughly and understand the competition in the business environment. A precise plan can also make it easier to interest investors and potentially lead to successfully raising funds.

PREPARING YOURSELF

Before you approach investors it’s vital you shop around and do your homework about which investor you plan on contacting. Find out their inclinations in relation to industry sectors, minimum investment amounts, exit requirements, and size of projects they deal with. Such information can be drawn from the internet or annual reports. It’s necessary that a good working relationship is established with your investor.

Entrepreneurs also need to be mentally prepared for what could be negative criticism and knock-backs along the journey to obtaining funding. Such criticism should be used as advice to help enhance the project. Throughout Ireland and Northern Ireland there are various banks and institutions offering financial support, and researching them can help you find the type of funding that will best suit your situation.

BANK FINANCE

Finance for business comes in three different forms – equity, grants and bank finance. Before approaching the bank, first see if grants and financial supports are available to you. Once you have organised either a grant and/or equity, you are more likely to be successful with any application to your bank. This is because, when it comes to bank loans, you’re required to have a good credit history, submit a personal financial statement, and sometimes make an equity investment in your business. All of these terms may not be easy for most young entrepreneurs to accomplish. For example, a few stains on your credit report from late payments in college could hurt your loan application. Many businesses are too new to get a bank loan because they haven’t been around long enough to have a track record yet.

Getting bank finance is like a selling exercise where it’s essential to sell the concept of the business idea to the bank. Banks assess the levels of risk of the proposal with the potential rewards match the risk. Ultimately, the bank wants to see if your proposed business venture has the capacity to repay the debt.

VENTURE CAPITAL

One source of finance is venture capital finance. Venture Capital is capital provided by full-time, professional firms (venture capitalists) or private persons who invest with management in ambitious, fast-growing companies who have the potential to develop into significant businesses. In addition to injecting cash into the company, the venture capitalist is likely to add considerably to the credibility of the company and to supply management expertise, support and access to their contacts. As part of their mentoring and monitoring of their investment, they are likely to insist on board membership.

In contrast to bank finance, venture capitalists are not looking for repayment, but for a minority of the share capital of your company in return for cash. Obtaining venture capital is very different from raising debt or a loan from a lender, such as a bank. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of your success or failure. Before you decide to apply for venture capital funding ask yourself if you’ll be happy with the loss of control that giving up a sizable chunk of equity could entail. The Irish Venture Capital Association (IVCA) represents venture capital in the Republic of Ireland and Northern Ireland. Its full members are venture capital firms which provide equity funding to growing unquoted companies. IVCA represents Irish based venture capital firms which account for 95% of the €1billion invested by Irish VCs in Ireland in the last ten years.

Enterprise Ireland and Invest Northern Ireland can assist companies with contact details and specific areas of interest for the major venture capital companies.

STATE SUPPORT

Enterprise Ireland offers two distinct funding categories for start-up companies, one is funding for exploring new opportunities and the second is funding for high potential start up companies. In Northern Ireland, Invest NI also offers businesses and individuals a broad range of financial support. The Business Expansion Scheme (BES) offers income tax relief to those who invest capital in qualifying Irish companies therefore enhancing the ability of companies to attract outside investment. Brian Cowen recently announced that the BES has been renewed for a seven year period to the end of 2013. The BES company limit is also being increased from a level of €1million to €2million, subject to a maximum of €1.5million to be raised in a 12 month period. The investor limit is also being raised from its current level of €31,750 to €150,000.

County and City Enterprise Boards offer a variety of financial supports to assist the start-up, development and expansion of small businesses in the manufacturing and services sectors employing ten or less people. They offer capital grants and redeemable preference share investments of up to €75,000, employment grants of up to €7,500 per additional employee, feasibility study grants, information, advice, and mentoring services.

BUSINESS ANGEL

For entrepreneurs requiring small amounts of funding, particularly at a very early stage in the development of a business, business angels may be a preferred source.

Business Angels, also known as ‘informal private investors’, are private individuals who invest capital in companies during their early stage of development. They like to spread their wealth in smaller investment amounts to young entrepreneurs with promising ideas. In addition they contribute their know-how or experience in company management and can offer valuable expertise and guidance. Business Angels can be a substitute for bank financing or venture capital which can sometimes be difficult to attract at the early stage of a company’s life. They are primarily motivated by return on investment and business angel involvement can often help secure access to venture capital or classical bank loans.

In Ireland, the Business Angel Partnership is a joint initiative between Enterprise Ireland, InterTrade Ireland and the Irish Business and Innovation Centres offering help to start up businesses. More help is provided by Enterprise Ireland as they maintain a database of Business Angel Investors. An entrepreneur seeking angel finance can submit a request to Enterprise Ireland who will conduct a search to identify business angels with an interest in the sector and the required funding level.

TAKING THE PLUNGE

Before you settle on one type of finance, educate yourself on the various flavours of financing available, and the pros and cons of each: debt, equity, asset and other sources. For most entrepreneurs, you must prove your concept first before anyone will put up that kind of money. This makes the process of raising money difficult but not impossible. With the numerous sources of funding available and with a well-prepared business plan under your belt it’s not an impossible task.