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Starting a business - financing considerations

By Warren Bygrave - 22 Nov 2013 - 1 comment

One of the key factors in starting a business is finance. The question to ask yourself is: do I have enough to get me started and see me through the hard times? You cannot assume that clients/customers will appear immediately. It often takes longer than you think. There are enough risks in business without increasing them by not considering all possibilities. 

I have previously mentioned the importance of having a good business plan and model when starting up or buying a business. This is where your lawyer and accountant can help you. It may all be new to you and it is very easy to be impulsive and take the first proposal you receive. Having done your homework and created a good plan, you should know how much you need. Also you should have calculated how and when you will need to use your own and any borrowed money.

As with the structure that you choose for your business, there are various methods and security arrangements available to you. 

Are you intending to trade in your own name or in partnership? If so, consider your personal liability.

Are you intending to form a trust in order to limit your personal liability and protect your existing assets? If so, make sure that your loan does not allow the trust to be a guarantor.

Are you intending to operate a company and limit your personal liability? If so, ensure that you understand the extent of the security which is being offered by your financier so that you retain the protection which you have sought.

Take the time to understand the differences between various forms of security:

  • Mortgages
  • General Security Agreements
  • Guarantees, and
  • how each of them applies to your situation.

The unfortunate aspect of needing to borrow when starting a business is that your financier (usually your bank) has no actual trading figures to go on. It has to draw on its experience of lending in similar situations. As a result, it will seek to increase your risk and limit its own. Do not be surprised - expect it!

Most of us need to borrow to start up or buy an existing business. Why not copy the boy scout motto and "be prepared". Speak to your lawyer before you go too far and commit yourself to loans and obligations you cannot change.

This investment will be life changing for you in so many ways. So make your decisions knowing the facts and with the odds as much as possible in your favour. The fewer the surprises, the better your business and life will be.


Warren Bygrave


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Your comments have touched on matters that need to be considered when starting a business.
Often funding for a new business draws on personal assets which could include the family home. These lending documents tend to have a "priority amount" in the fine print and that often exceeds the value of the asset that is being used as security. Borrowers should understand the implications of that amount and its associated risks .


The author replies       You raise a good point. It is normal for banks to include priority amounts in their securities. What we find is that it is often based on 1.5 times the value of the property or its purchase price. The banks’ view is that this allows additional borrowing without the need to redocument the loan. It is a term which is usually negotiable with the bank. A lawyer’s input can help with this.


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