Funding a New Start-up

B3FUL

Hi,
(I apologise firstly if posting on the wrong forum as I am encompassing more than one subject with this)

Im looking for some advice with regards to funding a new small business. I have almost completed a business plan, financial forecasts etc to present a case to possible lenders, for in the region of £15k-£20k (depending on certain options). Grants in the area and business type are not available.

However; I recently talked with a financial advisor who told me to consider using the equity I have in my house.

The house is currently rented with tenants until May. The house has equity in the region of £30k. The mortgage remaining is over 10 years and at the moment is at an interest rate of 1.49% (consent to let £99 per year)

The mortgage is not flexible to borrow back, but im out of the fixed term and so repayment charge is nominal.

I do have some affinity to owning a property however not enough for it to be an obstacle to the business.
From my limited knowledge, my options seem to be;

1. Sell the house. right now, the value is not appreciating, whilst my business forecast (of course an estimate) gives a better ROI.

2. Re-mortgage the house for 90% LTV, which I saw is in the region on 4.1% interest (if the will allow based on the reason for needing
the money)

3. Borrow from a business lender/bank. The interest rates will of course be higher and will be at the whim of the lender, I do not relish this idea, but the house will remain an untouched lump sum for future.

I plan to launch in March, and know that Iam up against it time wise, but would consider looking at a bridging loan whilst any other funding materialises.

I really would welcome what advice people would have as to the options presented or indeed if there are any other avenues I should pursue.
Thank you in advance of your support!

Pennywise

For a bank to lend £15k to £20k, they'd want security, so they'd want a second charge on your house anyway, so either way, the house would be at risk if the business failed. With that in mind, a re-mortgage is probably best as you'd get a lower interest rate than a bank loan.

Alternatively, re-think your business plan so that you don't need a loan of £15k to £20k at all. What were you going to spend it on? If it was for a vehicle or equipment, you should be able to buy on hire purchase or lease instead.

princeofpounds

As pennywise said, if the bank are asking for security then the mortgage would probably be the cheaper option in terms of borrowing cost.

However, reducing the equity in the property to low levels may cause secondary issues in terms of negative equity at a later date, which could impact on later refinancing or a sale and so on. Just something to bear in mind.

Selling the house makes sense too. If you think that your business offers you better returns, adjusted for risk, versus the house then it is logical to invest your equity in the business instead of the house.

So by keeping the house and borrowing against it to fund your business, what you are really doing is borrowing to remain invested in the house, not to finance the business.

That doesn't entirely match with your view on housing, but if the yield and capital appreciation minus costs exceeds the cost of debt then it's not necessarily a bad thing. But you need a crystal ball to be sure in advance!

B3FUL

Thanks Pennywise;
at £15k the vehicle will be leased (£20k included buying outright), but even then the first payment is £1500 ish upfront.

Approx £5k will be for initial stock (first order must all be paid pro-forma before credit terms are negotiated), £5k up front premises and fit out costs, with £5k for equipment, packaging, stationery, and a small amount of cash liquidity.

Can I ask why you didnt comment on actually selling the house and a having the cash and therefore zero interest? Whatever is leftover from the sale and after setup fees, would be invested elsewhere.

B3FUL

Thanks Princeofpounds, those are more in line with my thoughts too. This venture is a personal passion of mine and so do feel that the investment would be worthwhile as you have mentioned.
I certainly wish crystal balls worked! Although on a more personal level, I am in a position (as much as I obviously wouldnt like it) of little responsibility and so want to take advantage before other commitments are involved, which would be of greater impact in any negative eventuality.

paddyrg

Flog the house, stick the extra 10k somewhere you can't get at it instantly, but maybe 30 days notice. Businesses sometimes die from no trade, they frequently die from poor cashflow. Even the best business plan can underestimate the benefit of cash in the bank. Having access to cash to see you through unexpected bills or sudden opportunities will mean you're not forced to sell the house with a sitting tenant at a great discount to clear an unexpected bill.

paddyrg

B3FUL wrote: »

Thanks Pennywise;
at £15k the vehicle will be leased (£20k included buying outright), but even then the first payment is £1500 ish upfront.

Approx £5k will be for initial stock (first order must all be paid pro-forma before credit terms are negotiated), £5k up front premises and fit out costs, with £5k for equipment, packaging, stationery, and a small amount of cash liquidity.

In line with my post above...
Vehicle - can you buy second hand to get you through the first year?
Initial stock- can you buy smaller to start? The margins will be thinner but you'll get to see which lines are the winners before sinking more cash. Premises - seems low for a commercial lease, remember to allow for rates and be really really careful with lease terms (there are no protective laws as with domestic rental), so you can lock yourself in to 10 years having to maintain a wreck with no business to run from it. You may be able to scale back the printing, packaging etc- start off with a modest order and then spend more when the business is booming and needs it. Do you even need premises with a mobile phone and a vehicle? How about a virtual office for the occasional meeting and answering service?

Small cash liquidity is madness though - to me it says you'll be selling that brand new vehicle and startup equipment early and cheap. You are fronting stock, but clients may take 30-105 days to pay you (I've had corporate customers at both ends of that). If you're dealing with retail customers you need to provision for returns/repairs/SoGA/DSR's/idiots (see some of the boards here to see what self-entitled idiots can do to wear you down). Do everything you can to keep your cash in cash form! When the bucks are flowing in, then you can upgrade, restock etc.

B3FUL

Thanks Paddyrg, the vehicle as second hand is a possibility and have budgeted that at the 5k, any kess than this isnt going to be sufficient or reliable.
Stock is a difficult one as I need a range with depth and so need multiple suppliers, all of which require minimum orders.

The premises is cheap as I have come to an agreement to build a temporary wood cabin on the site; (myself), planning is not necessary and so only needing to consider the materials and fit out for startup, on going rates and rent is accounted for in the cash flow forecast and already agreed to a low rate for the first year.
The business really does require a retail premises, albeit a very modest one; having considered a virtual office scenario, from a marketing point of view, it would be detrimental.

paddyrg

...in which case, just make sure you can sustain yourself whilst building trade, and good luck!

lesleycoups

I've been told that you can get a grant of £8,000 to help with starting a new business, i want to start my own business and this grant would be very useful to me, but i can't find anything about it on the internet, so it seems as though this is untrue, are there any grants available? i'm 37 so too old for one from the princes trust, please help if you can thanks

somethingcorporate

lesleycoups wrote: »

I've been told that you can get a grant of £8,000 to help with starting a new business, i want to start my own business and this grant would be very useful to me, but i can't find anything about it on the internet, so it seems as though this is untrue, are there any grants available? i'm 37 so too old for one from the princes trust, please help if you can thanks

You should ask whoever told you that.

Grants for starting new businesses are few and far between.