Never leave you finances to chance, it doesn’t work that way.
It can take time to organise the money you need, so start early
There are various sources of finance available to small businesses, each carrying different benefits, risks, and costs. It is important to carefully evaluate your specific requirements and determine which sources of finance are best-suited needs of your business. Only fools rush in when the interest is high.
The question is… if you need money for your business by tomorrow, where would you go? The banks and most other finance companies are simply too slow. The answer is you avoid this situation and paying high interest by planning your financial requirements well in advance on when money is needed.
Once you have your idea for a business, you will probably need startup financing. That initial infusion of money needed to turn the idea into something tangible and that’s where it becomes tricky. There are risks involved, including the risk of bankruptcy with both your business and personal finances as well as broken relationships.
You don’t want to saddle yourself up with debt, but you don’t want to starve your business of working capital.
When you are just starting out, you’re not at the point yet where a traditional lender or investor would be interested in you. So that leaves you with selling cherished assets, borrowing against your home, maxing out credit cards, dipping into your savings, and asking family and friends for loans.
What is the purpose of the finance?
Understand clearly what the finance will be used for, for how long and how you are going to repay it.
- Working capital finance.
- Plant and equipment finance.
- Property finance
- Personal finance.
- To accommodate seasonal fluctuations.
- To aid expansion.
- For a reserve fund.
Raising capital for a start-up can be difficult .and inadequate financing can lead to stunted growth and missed opportunities. Sometimes it pays to borrow some money in the early stages, simply to develop a track record to help prove your credit worthiness.
The two main sources of finance
- Equity Financing. money invested into your business in exchange for a share in its ownership. This, of course, includes your personal money.
- Debt Financing. usually in the form of a loan where the principal amount borrowed and interest accumulated on the loan needs to be paid.
Sources of equity finance available to business
- Personal Savings. money that you personally invest into the business. This could well be enough to get you up and running.
- Relatives and Friends. people that you personally know who will invest in the business to assist you, should you need it.
- Angel Investors. wealthy individuals who lend their personal finances to a business in return for a share in its ownership.
- Venture Capital. Applications to professionally managed third parties such as a superannuation fund who lend finance based on a good business plan.
- Initial Public Offering (IPO). for a larger well-established business. They sell their shares to the public and have the company listed on the stock exchange.
“What do you need to start a business? Three simple things: know your product better than anyone, know your customer, and have a burning desire to succeed”. Dave Thomas
Sources of debt financing available to business
- Leasing of capital equipment and premises is a common form of financing. Used to acquire equipment for a regular payment for the duration of the lease term. There is no outlay to actually purchase equipment.
- Premises and equipment can be rented. Either short or long-term could be just the right initiative for you to conserve your capital.
- Bank Overdrafts. where you withdraw more than your account contains, with interest calculated on your outstanding balance.
- Term Loans. These are loans paid back to a financial institution over an agreed period of time.
- Credit Cards. Credit cards are easy to acquire but carry high-interest
- Commercial Bills. Short-term loans where the amount must be paid in full upon reaching expiry. Usually for financing 90 – 180 days.
- Letters of credit. Are documents issued by a financial institution, or a similar party, assuring payment to a seller of goods and/or services provided certain documents have been presented to the bank? These are documents that essentially prove that the seller has performed their duties under an underlying contract (e.g. the sale of goods contract) and the goods (or services) have been supplied as agreed. In return for these documents, the beneficiary receives payment from the financial institution that issued the letter of credit. Often used in importing and exporting.
- Loan Programs. short term loans set up to assist small business with initial startup
- Trade Credit. Deferred payment of goods and services purchased from a supplier. Trade credit is the largest use of capital for a majority of business to business (B2B) sellers and is a critical source of capital for a majority of all businesses.
- Factoring. Also known as debtor finance or cash flow finance. It is financial transaction whereby a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. The factor provides financing to the seller of the accounts in the form of a cash “advance”‘ often 70-85% of the purchase price of the accounts, with the balance of the purchase price being paid, upon collection from the account client. Whilst your business will be charged for this service, ultimately it will guarantee money reaches you in a timely fashion.
- Bartering. Is a system of exchange by which goods and services are directly exchanged for other goods or services without using cash. A barter exchange can operate between the buyer and seller for a commission.
- Loan sharks. Lend money at short notice, but charge very high They make it easy to borrow their money, even if you have a bad credit rating.
- Government grant. They are sometimes available for specific purposes to meet government objectives. Grants and other funding programs are available from the federal, state and territory governments and in some cases from local governments. Grants can also be part of programs designed to meet specific outcomes. Whatever is being offered by governments, be prepared to put up with long delays, frustration, and micro-managing?
Important issues to consider
This is the hard part behind starting a business by putting so much at risk. But doing so is the path to both success and failure. It’s what sets you apart from people who collect regular pay cheques.
With so much at risk, it is important to have a strong business plan, business model, and budgets in place and to seek out advice from experienced advisors. Forming a company structure early can assist with borrowing and lenders like to deal with legal entities.
An important thing to do is to ramp up initial operations as quickly as possible. This gets you to the point where your personal finances can see the business off to a good start, or outside investors can see and feel the business, as well as understand that you took some risk getting it to that point. Either way, it is important to build confidence in your new business.
Some businesses can also be financed by what is known as bootstrapping. You can build up quickly enough to make money without aid from investors who might otherwise come in and start calling the shots. Once you get over the initial hump, it is much easier to seek out funding sources available to more advanced startups and early stage companies.
- Is your business Investor Ready?
- How long will you need the money for before it is paid back?
- What terms will you require to fit in with your projected cash flow?
- Have you established a margin for contingencies?
- Do you have a well thought through financial budget?
- Do you have a summary document to present to the financier?
- Are you borrowing enough, for an unexpected economic downturn?
- Don’t leave yourself short. This is one reason why budgets are so important.
- Do you have your Business Plan ready to present? You will be asked for one.
- Do you need a broker, to assist in putting the required documentation together?
- Do you need someone to assist with contacts and/or negotiations?
- What collateral are you prepared to make available for the loan.
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Even with great ideas and all your best efforts, sometimes start-ups don’t make it to sustainability because they have not organised their finances well enough. However, by becoming financially savvy financial problems will be less of a burden. Goof financing arrangements make it easier to tilt the odds of success in your favour.
I find it is always important to look at the range of financing options available and the range of lenders. I find it also helps to free up your time and chances of success by engaging a good Finance Broker. They can take away all the paperwork and negotiate problems with different personality types.