Pros: You retain 100% ownership of your business and make all the decisions.
Cons: Depending on the finances you have available, you could slow the growth of your business.
The most risk-averse way to raise the initial money needed for your business may be from your personal savings. It may be that you have been planning for your business venture for some time and have managed to save enough money to get your start-up off the ground. By using the money you have already saved, there are no interest payments to think about and no other parties to consider when you are making business decisions. It also means 100% of the company profits remain yours.
Pros: You retain complete control and ownership of your business.
Cons: You could lose all your savings. You could hinder the growth of your business.
Personal bank loans
In our personal lives, if we need extra money for a project or life luxury, personal bank loans are often our first port of call. The interest rates tend to be favourable, and we often have an ongoing and historical relationship with a lender.
However, the majority of banks do not offer personal loans for business purposes.
Pros: Low interest rates. Loans can be secured or unsecured.
Cons: If you opt for a personal loan over a business loan, your name will be the one on the paperwork, meaning you are liable for the repayments, not your business. It is also likely to be a secured loan, so you may risk losing a personal asset if you cannot repay the money.
You may have an overdraft facility on both your personal and business accounts. Any overdraft facility should be arranged with your bank from the outset. If you use an unarranged overdraft or miss payments, this may damage your credit score.
On your business account, an overdraft sounds like a simple and easy option; once your account funds get below zero, you can still draw money by using your overdraft. This can be a convenient safety net for short term cash flow issues, like paying immediate invoices. Your bank account will have an overdraft limit, this is the maximum amount you can borrow, and it set at an individual level.
However, an overdraft, like a loan is not free, you still have to pay the bank back, and there will be interest to add on top. Once your balance is back over zero, you stop paying fees.
There are both secured and unsecured overdrafts. The same as with a loan, if you have a secured overdraft, you will need to secure the loan to a business asset, this is usually a property or something of significant value.
If you have an unsecured overdraft, you do not need to risk any of your business assets. However, it is worth noting that the interest rates on these tend to be significantly higher.
Pros: An overdraft facility is often already built into your bank account. You don't have to convince the bank to lend you the money for a particular project. You can ask for the overdraft limit to be increased.
Cons: The interest rates can vary drastically. If you need a large overdraft limit, this often becomes 'secured' so you have to risk your assets to borrow the money.
Family and friends
In the excitement of launching or growing a new business, it may be tempting to ask for the financial assistance of friends and family. If your start-up is going well and showing promise, you may even find that friends and family will want to invest in helping you grow the business and reap some of the financial rewards with you.
In many instances, family members going into business together can be a positive thing; for example, Go Ape, Specsavers and Jo Malone are all family-run businesses. In a survey from YouGov in 2013, 44% of respondents said they'd be more than happy to go into business with a family member, the main reason stated was trust.
If this is a route you are looking to consider, there are a few things to bear in mind. It needs to be made clear and be documented, precisely, what the conditions of the loan are; is the family member buying a share of the business, or is it a loan with a fixed term and interest rate? Will the repayments start immediately or when your company has a set turnover or profit?
It would be unwise from a business and personal point of view to rely on a chat over the dinner table to iron out the terms of the arrangement; it needs to be agreed and written down in detail with all parties signing. You don't need a lawyer to do this for you; there are templates you can use to outline the specifics.
Pros: Likely to be the most cost-effective way of borrowing money. You won't need the same level of detail and financial forecasting to secure the loan.
Cons: It's hard to walk away if the business fails, as you feel morally obliged to repay all the money you borrowed. It can cause substantial family rifts if it's not clear what the terms of the arrangement are.
Business or corporate credit cards are pretty much the same as personal credit cards but issued to your business rather than you as an individual. The credit limit issued on the card will relate to the credit history and rating of your business, rather than you as an individual.
Business credit cards are a type of unsecured lending, so the interest rates can be considerably higher than other forms of lending.
Credit cards can help with managing cash flow for your start-up, but they are unlikely to be the best source of funding for scaling the business due to the higher interest rates.
To apply for a business credit card, you will already need to be a customer of the bank and be able to show a proven track record in terms of revenue for your business. As a fresh start-up, it is also difficult to apply for a business credit card as you have no credit history.
Pros: Helpful for business cashflow rather than business growth.
Cons: Higher interest rates than other forms of lending.