BUSINESS BANK ACCOUNTS

If your business will be tiny or you’re likely to handle only a couple of large-ish cheques a month, then you can probably get away with putting them through your usual account. Otherwise you’re going to have to open a business account, and unfortunately they’re not free. You’ll usually get a period of free introductory banking with a business start-up account, but after that you basically pay in some way per transaction. Shop around and don’t necessarily stick with the bank you have your domestic account with. The banks will want your business so should negotiate, within reason, on the terms. Certainly don’t accept the first package they offer until you’ve at least tried to argue for a better deal. It won’t do any harm to try –after all, you’re in business now.

If you’re likely to have a lot of transactions passing through the account, then make sure you get weekly, or at least fortnightly, statements. You’ll need to keep track of what’s been received, what’s still owing and what’s bounced, and a month is too long to wait to find out.

When you come to open an account, the bank will probably ask to see your business plan plus details of where your start-up money is coming from. You’ll also have to provide all the usual ID. If you want more than one signature on the account, you’ll have to provide a list of names and examples of their signatures. You also need to say in what combination the signatures have to be used, for example two signatures per transaction.

Forget all the horror stories you’ve ever heard about bank managers and try to be their friend. It’s far better if you maintain a good relationship with them. So:

• Meet the person managing your account.
• Keep in touch with them.
• Send them a copy of your annual accounts.
• If you ever rewrite your business plan send them that too.

Go and see your bank manager immediately if you think your business could be in trouble. Take them into your confidence and tell them about your plans to sort things out. They’ll be immediately more sympathetic than if you wait for the cheques to start bouncing. You’ll also stand a far better chance of borrowing your way out of trouble if you’re seen to be managing your account sensibly.

THE START-UP MONEY YOU’LL NEED

Sit down and write out a list of the equipment you already have: you’ll probably have more than you realise, items like a PC, printer, scanner, phone line, mobile phone and car. Then write out a second list of what you’re going to have to buy and price that up. Include the cost of:

• stock and/or raw materials
• taking on any premises
• equipment
• office administration, marketing and advertising.
• Add to that how much you and your family need to live on until the business makes a profit. Depending on your business, this could be for a month, a quarter, six months, a year, or even longer.
• Add to that an amount for contingencies and disasters. Again this will depend on your type of business, but it should probably be equivalent to at least 15–20 per cent of the above total.

Then think about how much money you have and how much you need to borrow.

The timetable

Not all new equipment has to be bought immediately. It will help if you can stagger the purchases over several months. Think about drawing up a timetable, which should at least make you think about the options. Something like:

• January of next year: buy second vehicle.
• Summer of next year: replace laptop and buy two new printers.
• Beginning of the year after: replace industrial ovens/kiln/sewing machine/lawn mower.

HOW BUSINESS BORROWING WORKS

Most businesses, rural or otherwise, need some money to get started. The good news is that it’s probably never been easier to borrow money, and on reasonable terms. The bad news is that the form filling that goes with it has probably never been more complicated. This is especially true if you decide to apply for any grants or loans (see Chapter 5).

A potentially fatal but all too common mistake of small businesses starting up is to be under-funded. This often means that you run out of money too early, before your business is on its feet and starting to show a profit.

Another issue to address right at the beginning is that there’s nothing wrong with business borrowing. In our personal lives the usual best advice is to save up for something you want to buy. This advice is almost universally ignored, hence the astronomical level of personal debt built up on credit cards in the last few years. But in business it’s accepted practice to borrow, especially if it helps your business grow faster than it could otherwise have done. Or look at it another way: is the development of your business being held back because you don’t have enough money to expand?

What it boils down to is being able to borrow money and make it earn more money than it’s costing you in interest to borrow. A crude example of this is in the domestic housing market where in recent years it’s been possible to take out a mortgage that charges, say, five per cent interest, but which you use to buy a property that appreciates at ten per cent a year.

So use the same example in business.

You’re going into wine importing. You’re able to buy 300 cases at £50 a case. You should sell the cases on at £80 each. Your expenses are £20 a case, so you expect to make £10 profit on each one. That’s a £3,000 profit on an initial investment of £15,000, or a return of 20 per cent. As long as you can borrow money to buy more wine at an interest rate of less than 20 per cent then you’re making a profit. The difference, or margin, between the interest rate and the return you get is your profit. So, the more money you borrow, the more money you make.

This is simplified because there are different ways of calculating interest on borrowings and different ways of calculating profit on investments (if you take the £20 per case costs into account your profit is less), but it illustrates the general principle.

WHO TO BORROW FROM

A lot will depend on the type of business you’re going into and what you need the money for. You also need to think about whether you’d be prepared to hand over some of the business to a third party in order to raise finance.

Loans

The most obvious place to start is your bank or building society. This is a good, safe and easy method of borrowing: the terms should be reasonable, and as long as you can keep up the repayments there should be no nasty surprises lurking around the corner.

Loans are probably most suitable for buying tangible items (caterer’s industrial oven, potter’s wheel) and office equipment because you’ll know in advance how much money you need to borrow and it’s unlikely to change. Loans are not as appropriate for general running expenses because you may not need one all the time but would still have to pay interest on it.

The main advantages of loans are that they’re for fixed periods, you’ll know what your repayments are and can budget accordingly. The downside is that you’ll need to have a regular flow of cash through your business to meet the repayments, and that the loan will probably have to be secured (guaranteed) against something, usually the business or perhaps occasionally your home. This means that if for any reason you fail to continue paying the loan, whatever has been put up as security can be forfeited. In extreme cases the lender could close down your business or force the sale of your home.

Overdrafts

Overdrafts are more flexible than loans, but you pay for the privilege with higher interest rates. Overdrafts are more suitable for day-to-day running costs because you only borrow and pay interest on what you need. It doesn’t make sense to use overdrafts to buy fixed price items because it’s more expensive.

You probably need to be more disciplined to operate an overdraft successfully. Just because your bank has agreed an overdraft limit of X it doesn’t mean you should immediately go out and spend up to that limit. Instead, think of it as a safety net, only to be used if necessary. Also be aware that lenders will charge a higher interest rate if they think that you could be a risky prospect, i.e. you may default.

Overdrafts are usually secured or backed by business assets. Once again, if you default your lender could call in those assets and your business could be threatened.

Loans from family or friends

If your business is low key, you don’t need much to tide you over and you don’t want to go to the trouble of formally applying for loans or overdrafts, then borrowing from family or friends could be the answer. Mixing your business and personal life can be catastrophic, but there are ways to manage it which should minimise the risk of disaster.

Always, always, put the deal in writing. In the document make it crystal clear you are borrowing X amount over Y term and will pay Z interest. If you’re borrowing a large sum of money it’s probably worth talking to your solicitor.

There are several advantages to borrowing from family members or friends. On the whole, they’re likely to be more supportive, the process should be much quicker and simpler, and any benefit from the loan will stay in the family or at least out of the clutches of the high street lenders. But on the downside, the family member or friend may want to become involved in your business, relations can become strained if you fail to meet any of the payments, and if your business fails then the investor could lose all their money.

You have to decide whether the ease and flexibility of borrowing from family or friends outweighs the risk of something going badly wrong.

Shares

If your business is larger and you’ll need more capital, you could consider issuing shares. Businesses with high start-up costs, restaurants, anything property or land-based, or anything that needs to carry a lot of stock from the beginning, would fall into this category. Essentially a share issue buys someone a stake in your company. They get a say in the running and a share of profits (usually proportional to their investment) while you get their money.

By far and away the biggest problem is that the more shares you sell the less control over your own company that you have. Corporate history is littered with examples of desperate battles between shareholders and management. This probably sounds a bit extreme if you’re only considering selling a couple of shares, representing no more than four or five per cent, in your organic cafe to your faithful mum or best friend. But it is an example of what can happen if you don’t think things through.

Selling shares is best for raising money for larger and long-term projects. It could help you propel your business into another league or it could help you get started in the first place. Perhaps you’ve been selling your home-produced chutneys and relishes at farmers’ markets and craft fairs but would now like to buy premises and open your own small shop. Or maybe your dream has always been to run your own market garden. You have the expertise and the seeds but can’t afford the acres.

Shares are good because you’re not taking on debt and there are no regular repayments to make, but you have to decide if you’re happy to part with a stake in your business in return.

Joining forces

It may be a bit premature to consider joint ventures while your business is still in its infancy, or even before it’s been born, but it’s an idea always to keep at the back of your mind. Joint ventures are basically two or more businesses that get together, pooling resources and expertise, in order to reach a particular goal. The risks and the rewards are shared. Joint ventures are usually different from formal partnerships:

• Joint ventures can bring together complementary businesses while partnerships usually involve all partners doing essentially the same thing (solicitors, for example).
• Joint ventures are usually set up for fixed periods while partnerships tend to be open-ended.
• Partnerships are usually profit-driven whereas joint ventures may have a different goal, such as expansion and benefiting from the other business’s markets.

There are many businesses out there that naturally complement each other: tree surgery and landscaping, bakery and cheese-making, ceramicists and artists, illustrators and writers, and so on. There are several advantages to going into business together:

• You can cross-refer customers.
• You can gain access to new markets.
• You can pool resources (share shop or workspace).
• You can share knowledge, experience and expertise.
• You can share the risk.
• You can give each other moral support.
• You should be able to expand more quickly.
• You may be able to share staff (admin or clerical staff, counter help).

But there are several very obvious disadvantages too:

• You and your partner may have different ideas about where the business should be going.
• There may be a clash over different management styles.
• You may lose absolute control over your side of the business.
• Your money may be at risk (depending on how the joint venture has been set up).

Whichever way you do it, there must be a written agreement between the parties before you start working together, making it clear what the aims and objectives are. It’s just as important, and maybe even more so, if you’re going into business with a friend and would like to stay friends. It’s probably safest that a solicitor draws up the agreement.

Equity finance

More business jargon, and probably only for those who need really big sums of money to get started anyway.

There are two methods here:

• Business angels. Angels come in all forms (they back West End theatre) but in this case they tend to be private investors who invest in small to medium sized businesses that have excellent potential to grow. Typically angels invest from around £10,000 to £100,000 in new businesses or those in the very early stages of expansion. In return they’ll want to receive a significant proportion of your profits.

• Venture capitalists (VCs). These are companies that are prepared to lend large amounts of money to fledgling businesses. However, you need an excellent management track record, a strong team around you and a first class business plan. Unless you’re planning to found a global enterprise (after having done it successfully at least once before) then don’t hold out too many hopes on this one.

But if you do think either of the above is a realistic and serious option which is at least worth exploring, then talk to a business adviser or your bank manager.

THE ART OF PRICING

Pricing is about far more than what something cost to make or supply, with a bit on top for profit (unless you’re planning an unlikely career in gasket manufacturing). Pricing says a lot about a product or service. It talks about status, luxury-quotient, the type of person likely to buy it and where it’s positioned in its sector.

If you price something too cheaply then customers will be suspicious, wondering if it’s not quite up to scratch, shoddy and poorly made. Different rules apply to basic foodstuffs and household items where cheapness and value for money can sometimes be a virtue. But on the whole the psychology of higher prices applies to most things.

If you’re not convinced, have a look around your own home, your furniture, kitchen ware and other possessions, your clothes, your children’s clothes, shoes, perhaps jewellery, and certainly the cars. How many times did you reject something cheaper in favour of what you ended up buying? There are endless excuses we make to ourselves: it’ll last longer, it’s a good investment, it’s more hard wearing, it won’t date, it’s better designed so more useful … ultimately, however, we’ve been seduced into thinking that by the price tag.

The Aga is a classic example of pricing and branding snobbery. It’s a brilliantly engineered, quality object which does exactly what it’s designed to, i.e. be a cooker and a source of heat, but is it worth paying a premium price? There are far cheaper ways of cooking and heating but people are still queueing up to buy them. Ask yourself why.

That’s not to say you think of a figure for your own product or skill, stick a zero on the end and sit back and wait for the bucks to roll in. But pricing is an extremely important element and one that you should be thinking about right at the beginning. So, factors to consider:

• How much did it cost to make or produce (raw materials and labour)?
• Or, if providing a service, what is the minimum per hour or day you would work for in order not to starve?

• What about other costs – power, heating and lighting, admin and vehicle charges?
• What do you consider a reasonable profit margin, 10, 15, 25 or 50 per cent?
• Are there many other competitors nearby?
• What do they charge?
• How necessary is your product or skill? (Are you the only skilled and available sheep shearer within 20 miles?)
• How desperate are customers likely to be for your product or skill? Do you make the only decent bread in your valley while the nearest supermarket is 15 miles away?
• Is your product or skill a luxury, the first thing to go if there’s to be belt-tightening? Handmade velvet-trimmed shoes, fresh cream truffles, bespoke rustic furniture, £500 footstools? Pedicurist or aromatherapist?
• Is there any rarity value in what you’re offering? Are you a skilled portraitist who’ll work in oils and spend many hours on a single commission?
• How well-off is your typical customer likely to be?
• Will they have much disposable income?
• Are they likely to show loyalty to your product or skill?
• Are you working and living in an economically healthy area?
• Is your product or skill weather-dependent?
• Is the cost of any of your raw materials likely to be volatile?

When you’ve decided on your price then ask yourself: ‘Would I buy this?’ because at the end of the day that’s the only question that matters.

There’s always scope for amending your prices as you go, but it doesn’t look great if there are great swings in prices or too many changes too close together. Small increases, which can be blamed on inflation, probably look better than small decreases, which will only make you look desperate. If in doubt, pitch prices on the low side, at least at the beginning.

But you must never be afraid to increase prices when your costs increase, i.e. pass on the rises to your customer. And you must review your prices at least once a year.