Funding for business start ups

Funding for business start ups – challenges and solutions.

Starting a new business is no easy task, especially navigating the way through funding for business start ups. Between January and March 2024 within the UK, there were 244,717 incorporations. For some of these companies the initial set-up process would have been easy, they are possibly “sister” companies, or were brought to life by already seasoned business owners. But, what about the dreamers? Budding entrepreneurs embarking on their first business adventure the first 5 years can be treacherous. For new businesses, these 5 years are known as “The Death Valley Curve”. The period where little to no income is coming into the business, but the company is spending on vital essentials. For example –

  • Product or service production.
  • Office or building space.
  • Equipment and technology.
  • Marketing and sales.
  • Employees or sub-contractors.

Later within this blog, we will discuss challenges start up business can face when seeking funding along with solutions to cover these challenges.

Initial markers for new businesses

Before the above items come into play, there are initial markers for new businesses to consider. Let’s explore them.

  1. Market research. How much will the initial set up cost? Who is your target audience? Who are your competitors?

These are the basic questions to consider when conducting market research. From the findings, you can start to form answers into how to much funding you’ll need to launch the business into the market.

  1. Legal requirements. Does the business need a licence (or licences)? What are the vendors payments terms and conditions? Will the business need employee contracts? What are the businesses invoicing terms? When considering legalities, it’s in the businesses best interest to seek professional help. Whilst this may be thought of as an additional costing upfront, it can save money in the long-term. By understanding the legal requirements, start-ups businesses can mitigate the risk of financial losses due to poor overview of their legal requirements.
  2. Tax implications. What type of company will the business be? Sole trader, limited liability partnership, partnership, or a limited company? Each type of company has different tax implications, benefits, and liabilities.

Challenges for new businesses seeking funding

Starting a new business is a costly affair, as above, there are many expenditures to consider before cash starts to flow into the bank. Most, rely on some form of loan or funding solution to help get the business off the ground, and into the market. However, there are some restrictions when it comes to traditional loan methods.

Limited Track Record: New businesses often have either no credit score or a poor one. Plus, they lack a proven track record of incoming invoices. This can make it difficult for lenders and funders to assess the risk involved in providing funding. Without a history of profitability or established market share, it can be challenging to convince them that the business is not a risk.

Collateral Requirements: Traditional loan options can require collateral, which is an asset the lender can seize if the borrower defaults on the loan. For startups, this can be a major obstacle. New businesses typically don’t have a lot of assets built up yet, making it difficult to secure a loan with collateral requirements.

High-Interest Rates: Even if a startup can secure a loan without collateral, they might face high-interest rates due to their perceived riskiness. High-interest rates can significantly impact a startup’s profitability, especially during the crucial “Death Valley Curve” period.

Repayment schedules: Allocating cash for repayment terms, can be difficult for start up businesses whilst establishing themselves within the market. Especially as seasonal peaks and troughs of trading are yet to be experienced. This equates to money going out of the door in repayments, when it is needed to support the fledgling business.

Alternative Funding Options

Whilst traditional funding methods can be beneficial for startups, there are alternative options to consider:

Small Business Grants: Government agencies and non-profit organizations sometimes offer grants to startups in specific industries or locations. Winning a grant can be a great way to secure funding without incurring debt, but the competition can be fierce, and the application process can be lengthy and onerous.

Invoice Finance: Invoice finance is an alternative funding solution whereby the business sells its upcoming invoices to receive pre-payment. Rather than waiting for customers to pay their invoices, the business can receive the funds within 24 – 48 hours of raising the invoice. Typically, invoice finance providers look at the businesses whole financial landscape, such as the creditworthiness of their debtors. Meaning that, start ups businesses can be looked at favourably, and benefit from a facility that grows with the business.

What is invoice finance?

Invoice finance is an umbrella term that covers: invoice factoring, invoice discounting, and confidential invoice discounting. SMEs across the UK favour invoice finance over traditional loans due to its initial set up requirements, proven cash flow benefits, and funding flexibility. Businesses can promptly settle payments to employees and suppliers, invest in operational improvements, and pursue growth initiatives earlier. This translates to greater financial flexibility compared to traditional loans.

There are similarities and differences within the facilities, depending on the businesses budget and resources one may be more suited than the other. The similarities are:

  • Funding available within 24 to 48 hours of the invoice being raised.
  • Funding provided between £20,000 and £1 Million.

Invoice factoring (recourse factoring): After the invoice finance provider receives notification of the sales transaction, they will manage all aspects of the sales ledger – until the debt is paid. The business not only benefits from receiving pre-payment on their invoices, but also from outsourced credit control. For start ups and new business owners, this facility frees up time and resources which can be allocated to other aspects of the company. As invoice factoring includes additional service of credit control it can be priced higher.

Invoice Discounting (Disclosed invoice discounting): The business manages their own credit control – whilst receiving pre-payment on their upcoming invoices. This facility tends to be cheaper than invoice factoring as it does not include credit control services. Invoice discounting is a valuable funding tool for businesses with strong credit control, and those with minimal debtors.

About us

We are Partnership Invoice Finance, an invoice finance provider in Paddock Wood, Tonbridge. Our team of professionals are client relationship focused. When first meeting our regional sales managers, they will start by discussing the businesses unique needs in depth. Through this process, we come to understand what the business needs financially, and future goals they wish to achieve (such as expansion, better cash flow management…). Then, we provide a quote for funding solutions that are tailored to the business’s needs, aspirations, and growth plans.

We recognise the hardships in starting a new business. Contact us to enquire about our solutions to: funding for business start ups.