• How much
• When and how
the finance is needed for?
(if any) can be provided?
• Whether the
is prepared to give up some
(ownership) of the start-up in return for investment?
As mentioned earlier, most start-ups make use of the personal financial arrangements of the
. This can be personal savings or other
that have been accumulated. It can be personal
which are made available to the business. It can also simply be the found working for
Cash flow describes the
of cash into and
of a business.
When you look at the
of any business, you soon realize that cash flow is a
and often unpredictable part of business life. It's consistently moving.
Cash inflows is movements of cash
a business where as cash outflows is the
of cash out of the business cash flows into the
account when customers pay for their
, when a loan is received from the bank,
is received or when assets are
whereas cash flows out of the bank account when
are paid, employee wages and salaries are paid; interest is
to the bank and so on.
The difference between the cash inflows and cash outflows during a specific period (e.g. a week, month) is known as the "
". Net cash is commonly used in
a company's cash
More generally, net cash can refer to the amount of cash remaining
has been completed and all charges and
related to the transaction have been subtracted.
The challenge for any business (particularly a start-up) is to ensure that it
to ensure that it does not run
A start-up company can also raise finance by selling shares to external investors – this is covered further in the next question.
Personal sources, retained
and share capital invested by the
are the main
sources of finance for a start-up.
Personal sources are the most
sources of finance for a start-up and are explored in share capital invested by the founder.
Retained profits is the cash that is generated by the
when it trades
. It’s another important source of finance for any business,
They can generate cash from the moment
. Another internal source of finance is
– invested by the founder. The founding
(/s) may decide to
in the share capital of a company, founded for the purpose of forming the start-up. This is a
method of financing a start-up. The founder provides all the share capital of the company, retaining
% control over the business. The entrepreneur may be using a variety of personal sources to invest in the
. Once the investment has been made, it is the
that owns the money provided.
The shareholder obtains a return on this investment through
(payments out of profits) and/or the
of the business once it's sold eventually.
Loan capital can take several forms, but the most common are a
or bank overdraft. A bank loan is where the bank stating the
period over which the loan is provided (e.g. 5 years), the rate of
and the timing and amount of
term basis. Some
security for the loan will usually have to be provided, although this normally comes in the form of personal
provided by the entrepreneur. Bank loans are good for
investment in fixed
that a bank overdraft. However, they don't provide much
. On the other hand, a bank overrdraft is a more short-term kind of
which is actually a loan facility – the bank lets the business "owe it money" when the bank balance goes below
, in return for charging a high rate of interest. As a result, an
is a flexible source of finance, in the sense that it is only used when needed.Handling seasonal
in cash flow or when the business runs into
-term cash flow problems (e.g. a major customer fails to pay on time) are made easier (to
with). Two further loan-related sources of finance include
capital from outside investors which usually consists of the friends and family of the
. The friends/family may be prepared to
substantial amounts for a longer period of time; they may not want to get too involved in the day-to-day operation of the business. Both of these are
for the entrepreneur. However, there are pitfalls. Almost inevitably,
develop with family and friends as fellow shareholders. Business
are the final main kind of external
in a start-up company. Business angels are
investors who typically invest £10k - £
k. They prefer to invest in businesses with high
prospects. Angels tend to have made their money by setting up and selling their own
(therefore proven entrepreneurial expertise). In addition to their money, Angels often make their own skills,
and contacts available to the company. This can be a significant advantage to a start-up, although the entrepreneur needs to accept a loss of
over the business.
capital is a less important source of finance for start-ups and is a specific kind of share
that is made by funds managed by
investors. Venture capitalists rarely invest in genuine start-ups or
businesses as they prefer to invest in businesses which have established themselves. Another term you may here is "private
" – this is just another term for venture
. A start-up is much more likely to receive investment from a
Savings and other "nest-eggs"
Share capital (inside investors)
Friends and family
Loan capital (bank loan/overdraft)
A business has many different
from paying for
materials through to paying the rent or the heating
. By careful classification of these costs a business can
and make better-informed
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