Funding for start-ups – an overview

Let’s start with the bad news – In a tough economic climate there will always be a tightening in criteria for start up finance.  The better news is that there is still funding available; we at Fit Out Finance are still able to help well researched, properly set up start-ups with funding.

What is a start up in finance terms?

Most of the market defines a start up as a business that has been trading less than 2 years.  Some will extend that 2 years to include a requirement for 2 sets of published accounts (So in theory up to 3 years).

In a recent development, some lenders have narrowed their scope to include the provision that they must have been trading for a minimum of 3 or 6 months. So this effectively excludes pre-starts and those in extreme early stages.

On the other hand, there are what may be described as ‘technical start ups’. A frequent example is roll-outs of outlets, where for practical or accounting purposes, each new outlet is a new company, though the group itself is established and profitable. Lender attitudes will vary, but in many cases, these will be treated in line with their parents rather as opposed to your regular start-up.

Why do lenders treat start-ups differently from established businesses?

All reputable lenders will undertake checks on affordability as part of their credit process. This means using available information to establish whether a borrower is likely to be able to meet repayments when they fall due.

Whilst there are many different approaches, the most solid and reliable tools available are historical trading information and past credit performance (including repayment history).

By definition a start up won’t be in a position to provide this information in a meaningful way, so lenders have to base their decisions on whatever information is available. This will vary from one lender to another, but is likely to include:

• A business plan with projections.
• Relevant experience of owners/key individuals.
• Financial credibility of business owners.

Since credit decisions are based largely on predictions rather than solid experience it is usual for lenders to require some additional ‘fallback’ security – usually in the form of personal guarantees from the owners. Many lenders will insist that guarantors are homeowners.

What types of finance is available to start-ups?

Whilst accessing finance is slightly less straight-forward for start-ups, there are still many lenders out there, offering a full range of business funding products including:

• Term loans – Secured.
• Term loans – Unsecured (Read more about Start Up Loans below)
• Asset finance.
• Invoice finance.
• Merchant cash advance.
• Commercial mortgages.

There are probably others too!

What are Start Up Loans?

I am referring here specifically to the Government-backed Start Up Loan scheme; whose purpose is specifically to fill the gap left by banks and independent lenders. In fact, there is a little-mentioned provision that applicants should have already been declined by their bank.

Unlike commercial lenders, Start Up Loans will never seek bricks & mortar security; nor will they take up-front fees.

There are qualifying criteria, however most of their decision-making revolves around a solid, researched business plan.

It’s State assistance rather than a commercial facility – That comes with a big slug of bureaucracy but more lenient lending parameters.

Contact Us

Are you a start up business looking for an instant cash injection get you on a roll? Why not get in touch today? Give us a call on 01494 422 614, or send an email to [email protected] to see how we can help fund your business.