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CHAPTER 9
Where is the Money?
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Business model cube™
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Learning outcomes
Identify basic financial tools
Discuss credit scoring
Examine essential business cost
Evaluate funding sources for start-ups
Select funding sources
Explore bootstrap financing with a co-creation approach
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5. Bank accounts and credit scoring
Need for a bank account for trading
Business accounts
Often free of fees to pay for first 12 or 18 months
Savings accounts
To get some higher interest paid for money in account
Credit scoring
= Record of financial behaviour (repayment of debts, payment of bills and store cards)
Young people lack often credit history
Appear to have low credit rating
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Business cost
Fixed and variable cost:
Fixed cost – do not vary with amount of business activity / outputs (overheads)
Examples: Salaries, rent, bills for phone / internet, business insurances, business rates,
Variable cost
Vary with output and business activity
Example: Amount of material needed to build a shelf
Semi-variable cost
Some fixed element, some variable usage related element, such as gas bills (provision charge, and usage charge)
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7. Wages and salary on-cost
Minimum wage
Legally fixed in some countries, such as UK
Dependent on age in the UK:
Living wage (higher than minimum wage)
Hourly rate adjusted for the environment – large city / rural, and the actual living cost
Wages with no limit
Set by professional organisations for types of work, negotiable
Salary on-cost
Paid by employer on top of salary: pension contributions, national insurance contributions (UK)
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Tax
Sole traders
Pay income tax on profits taken out of the business
Dividend
Is money taken out of a business not through a salary but as drawings
Taxed with a different rate in the UK
Corporation tax
Paid by the business on profits
Varies by amount of profits in tax year
UK 15 % in 2015
VAT
Exists in most countries
UK: in 2015
Compulsory registration for businesses making over a threshhold amount
UK 2015: £ 82,000 turnover
(accessed 5/10/15)
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9. Sources of finance for start-ups types
Direct personal finance sources
Bootstrap finance
Debt finance
Grants
Equity and investment
Crowdfunding
Invoice financing
Asset finance
Credit by suppliers
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10. Direct personal and bootstrap finance
Direct personal finance sources
Bootstrap finance
Savings
Income from a job
Cash through selling assets, such as car, PC etc.
Inheritance
Loans from friends and family, partners, work colleagues
Create a record of amount and agreement for when to repay they money
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Debt finance
Banks
Overdrafts, credit card borrowing, loans,
CDFIs – community development finance institutions
Reinvestment trusts - UK
Start-up Loans – UK government loans for start-ups
Peer lending – UK
Example: Funding circle,
Operating internationally
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Debt finance
Micro-credit
Example:
Groups of start-ups gathered – 5 to 7 ideal
One group member gets a small loan
All group members support member in starting the business and paying the loan back
Second member gets loan – all members support this member until loan is paid back
This is continued until all members had a loan and paid it back.
A new round of micro-loans can then be started.
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13. Grants and start-up competitions
Grants do not have to be paid back
Dependent on country and region
Some local governments / Councils / Municipalities give out small grants
Start up competitions to win money – UK
Shell live wire
NACUE runs Varsity pitch every year
The pitch
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Equity investment
Gaining investment and giving shares in return
Investor will take share of profits / losses.
Case studies Richard Rodman / Crowdentials, Frinter Ltd. and Foleoo had investments in return for shares given away (see Box 9.3).
Added value when using Business Angel:
New skills, contacts, knowledge added
Risks are shared
Limitations when using Business Angel:
Time consuming, demanding
Loss of 100 % control
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Crowdfunding
What it is:
Internet platform bringing small investors and small businesses / start-ups together to raise funds for projects
Types:
All money has to be raised that is asked for to get the whole amount raised
If not all money was raised, partial amount can be taken
Return offered:
Equity, payment in kind (free services/products), interest and repayment
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Crowdfunding
Added value
Limitations
Quick access to funds
Small cost of lending
No securities have to be put down
Free PR for the business
No intellectual property (IP) protection, as open to everyone
IP has to be in place before publication on platform
Limit security for investment
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Crowdfunding cont.
Growing exponentially: over 50 in 2015 in the UK
Examples:
UK Crowdcube, Seedrs
Netherlands Geldvorrelkarr.nl
Europe focus: Crowdme.com
Finland: Ianinaaja.fi
International: Indigogo
Sector focus, international:
Kickstarter – the arts
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Invoice financing
Factoring
Customer knows you are using an external company to manage your invoices
Invoice financier buys invoice amount and pays you immediately, works with customer until payment comes
Invoice financier takes fee (15 % of invoice amount is common)
Invoice discounting
Customer unaware of external company
Financier lends money against invoice amount against a fee
Customer payment used to pay off loans
BUT you loose profits
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19. Leasing and asset finance
Leasing or renting assets
Machines for production, cars / vans, tools, IT equipment
Added value:
Latest equipment can be used
Regular monthly payments, no large sums upfront
Limitations:
More expensive in the long run
Long term contracts difficult to get out of
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20. Funding for social enterprise start-ups only, UK
Big issue invest
School of Social Entrepreneurs (
Start-up programme with small grant (under £ 5,000)
Offers training, mentors and action learning sets
UnLtd (
Start-up grants, training
Growth grants, online resources
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21. Selecting funding sources (examples Box 9.9)
Limitations through legal form (see Chapter 8)
Personal values, norms, cultural values and norms may limit some funding sources
Kathryn Kimbley, HumAnima CIC founder
As social enterprise, only some funds available
Ben Smith, Frumtious Ltd. founder
Did not want to give away shares, excluded him from some programmes available
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22. Non-monetary funding co-creation application
Offering volunteering opportunities
Payment in kind and offer to gain skills and references for job application
Exchange of goods/services
Time against time spent / mixture of time spend and expenses paid
Leveraging networks (application of network theory)
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Summary
You need to know the choices of accounts to run a business.
There are plenty of funding sources beyond banks to bring money into a start-up. Peer-to-peer sources are growing, offering debt finance and investments against rewards.
Crowdfunding is the biggest growing source of finance.
Taxes, fixed and variable cost are important expenses you need to address.
Selecting finance sources needs to be done carefully matching personal needs and values.
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Questions?
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