Small business funding: How much money should you ask for?

Nearly every founder of a new business experiences the same problem: with no reputation or revenue, how do you convince funders that your start-up is worth investing in or lending to?

Well, to start with, it's essential to ask for the right amount. Aim too high and you'll attract scepticism; too low and you'll be greeted with caution.

How, then, to arrive at a figure that investors will take seriously while remaining interested? Here, we look at why it pays to consider your options carefully.

Planning for investment

If you've written a thorough business plan, and drawn up equally thorough cash-flow and profit forecasts, you should have a clear idea of how much money you need to raise.

In your business plan, remember to explain – in detail – how your idea is validated, and how you intend to use the money you get.

After arriving at a figure, you may be tempted to speak to the bank manager – but there are two reasons why you should hold off rushing to book an appointment.

Look again at the amount you think you need

Arriving at a figure is one thing, scrutinising it through a lender's critical eyes is another. Whichever funding route you go down, you'll be made to show that you've done your homework.

• Will you be making enough to meet any repayments?

• Do you know your credit score, in case of any questions about your credit history?

• Do your figures really add up? 

Detailed financial forecasts sometimes show that founders need less money than they anticipated. But it's also worth bearing in mind what would happen if the sales you predicted don't actually materialise. Going back to your lender and asking for more won't inspire confidence, and they may reject your request.

When deciding on an amount, be conservative. But don't be so conservative that it makes your business plan unviable, or causes you serious cash-flow problems further down the line. This exercise, in essence, is about taking a meticulously calculated risk – one that should pay off.

When it comes to funding, you have options

You shouldn't necessarily see your bank as your go-to source of finance. Yes, you may have a relationship with them already. And yes, its overdrafts and loans are simple, competitive and, in the case of loans at least, flexible (at least until you want to pay it back early, in which case you may be charged).

For start-ups, however, it's worth considering potentially strict upper limits for overdrafts, and the fact that banks can demand instant repayment.

Some loans, meanwhile, may be secured (against things like your home). They may also have variable interest rates, which can make longer-term financial planning harder. Further, there's the issue of your bank being potentially unwilling to lend to your early-stage business.

Start Up Loans, by contrast, take the form of unsecured personal loans. 'Unsecured' essentially means that you agree to make regular payments until you've repaid the loan in full. (If you're not able to make these payments, you may incur additional charges.) They also have fixed interest rates of 6% and come with additional benefits, like access to free mentoring.

There are, of course, other options, each with their own pros and cons. These include:

• loans or investment from friends or family

• crowdfunding

• selling shares in the business

• taking partners

If you're borrowing, the takeaway here is to shop around. To do this, you can use Enterprise Nation's Funding Hub, which presents small business owners with appropriate funding solutions tailored to their circumstances.

If you're beyond the start-up stage, you're likely to be eligible for more options, which is why it's even more important to find one that matches both your situation and onward projections. That might be:

• a secured or unsecured business loan

• a quick business loan

• a merchant cash advance

Three tips when deciding how much money to ask for

• If you proceed with a loan, know what your monthly repayments will be, and how you'll be able to afford these alongside your other expenses.

• If your business is new, lenders will look at your credit rating. You may be able to improve yours by building your credit history and making any payments you're already committed to on time. This should give you a better chance of securing the amount you need.

• If your business has been trading for 12 months, create a three-year cash-flow forecast. This will convince lenders that you'll be able to repay the amount you're asking for.

Looking for finance for your business?

Personalised finance options for start-ups, small businesses, sole traders and freelancers. Take the Funding Hub tool and get recommendations tailored to your financial needs.

Also in this series:

• Small business funding: How to use the money you raise

• Small business funding: How to choose the right type for you