Funds for all the family - how to raise money

Without capital, good ideas remain just that.
Click to follow
The Independent Online

"Be your own boss" ran the inviting headline in the personal finance section of a popular Sunday newspaper. "It's time to throw off the shackles of wage slavery." On the small business page in the same paper there was a very different headline: "Danger of securing loans on your home."

"Be your own boss" ran the inviting headline in the personal finance section of a popular Sunday newspaper. "It's time to throw off the shackles of wage slavery." On the small business page in the same paper there was a very different headline: "Danger of securing loans on your home."

The piece that followed described the plight of the owner-manager of a small business fighting one of the high-street banks to retain possession of her home. She had given her home as security for her company's debts, and had been battling the bank for the past 10 years. In that time the amount the bank was claiming grew from the original loan of less than £100,000 to just under £250,000.

From time to time, many of us have felt the urge to go it alone. In much the same way as we might think about buying a beachside bar, under the influence of sangria and Spanish sunshine. For most of us, the dream fades as the wheels of the homecoming plane splash down on the runway. Back in Britain, with the reality of the bills piled behind the door, we are reminded that being a wage slave has its advantages.

In spite of the obvious difficulties facing the newcomer, it is estimated that there are 3.7 million small businesses in Britain. Around 75 per cent of British businesses are family-owned. Yet Britons are three times less likely to start their own businesses than Americans. The US likes to call itself the land of opportunity, but is the difference in the numbers of people becoming their own boss simply a cultural one?

In my experience it is much more to do with the way that new businesses are funded in this country. The wave of redundancies that came with "downsizing", and the drive to cut costs, created a substantial population too young to retire and too old to find a new job. With high hopes, and a little pot of redundancy money, the new entrepreneurs swelled the ranks of the self-employed. Invariably redundancy money is not enough to carry the new business through the difficult first months. When the redundancy money runs out, the owners search frantically for additional capital. Family and friends are canvassed, usually without success, until eventually banks are approached.

Not every start-up follows this pattern. An increasing proportion of new businesses are launched only after a robust business plan has been developed, often with the help of professional advisers. These are the businesses that have the greater chance of success.

The enthusiasm of the beginner is tempered with the financial and business skills of the experienced professional. The new business is funded carefully on the basis of the business plan, and realistic projections of income and expenditure are discussed and amended.

That still leaves too many start-ups that are launched on "a smile and a shoeshine." The fact that the man you met in the pub thinks your idea for a new business is a winner is not a good enough reason to leave the day job.

If you are buying an existing business, have property and stock professionally valued. Ask for at least three consecutive years audited accounts. Ask your own accountant to look at the figures, and report on them in writing.

If the property is leasehold, check the terms of the lease and make sure that they allow the business to be conducted without undue restrictions as to access, hours of trading, and competition. Make sure that the lease is assignable, and that provisions for increases in rents are reasonable.

Check that the business is operating within local planning regulations. Have the lease checked by your own solicitor.

If you are considering starting a business from scratch, it is essential that you develop and write a detailed business plan. Most of the high street banks will provide pre-printed business plan templates that give the headings for setting out fixed and variable costs in addition to revenue projections.

Self-completed business plans can be used by the bank as a rather cynical, retrospective justification for lending to a start-up business, when in fact the money is being advanced against collateral.

The truth is that UK banks will rarely, if ever, lend to a new, small business without security. Security will be in the form of a first charge on the borrower's home, the deposit of quoted shares, or an insurance policy that has been in force for some years and on which premiums are paid up to date.

If you are contemplating using your home as security, remember that your spouse must agree, and must be separately advised before entering into any agreement. You will both be asked to sign an "all advances" guarantee, and the terms will not be variable. Either you and your spouse agree to accept all of the terms set out in the bank's document or you won't get the money.

Depending upon the amount of funding required by the new business, unsecured borrowing has its advantages. There are a number of unsecured loan offers in the market and a thorough search will turn up some reasonable rates of interest.

Asset financing is another alternative. Where capital equipment is needed for the new business, items such as computers, photocopiers or office furniture can be leased. Because the leasing company retains ownership of the items, they do not take security. Leasing gives the new business all-important cash flow.

Starting your own business is not an easy option. To be successful requires commitment, determination and a well-developed business plan. If you are looking for funding, be clear what kind of funding you need.

Try the small firms loan guarantee scheme or use alternatives such as leasing and factoring. Above all, avoid using your home as security against bank borrowings. Banks are not a social service. If you give the bank security and fail to repay borrowings, the bank will not hesitate to foreclose. Ask any one of the owner managers who are among the 50,000 people who will have their homes repossessed this year.


John Caine MBE is chairman of GCI Financial in London. From 1992 to 1999 he was Director of Corporate Affairs at Alliance & Leicester. He was Alliance & Leicester's representative on the Council of Mortgage Lenders (CML) and the British Bankers Association (BBA)