Knowing how much business fundings you need involves choosing from a vast array of alternatives. Debt or equity? Secured or unsecured? Are you at start-up, already launched, profitable, looking for exit / succession funding? How much resources have you committed to growing business fundings?
By: Hitesh Khan/
What does a lender or investor want from someone seeking business fundings? What are some of the myths?
Probably the most common mistake we find among those seeking financing for their business is the idea that someone else will stake them to their dreams without them taking a large share of the risk.
Think about it – how much confidence will a lender or investor have in your proposal if you don’t have enough confidence in it yourself to put your own resources at risk?
So, the most basic rule of financing business is to commit yourself and your savings or resources to the business.
For a start-up business, which might not be able to obtain funds on credit, the owner will have to come up with capital, such as from personal savings. No matter where else you look for funding, the money you put in is a strong sign of good faith and commitment to other lenders. Consider borrowing from friends and relatives and /or selling off surplus assets to provide the funds you need.
For an established family business, financing is often needed for expansion or to assist with transition of ownership from one generation to the next. As part of our succession management program, you should always consider the economics to “build or buy” as part of their growth strategy. Given the current economy, there are many businesses to buy – but certainly not without expert advice”.
Your business plan should tell you. Things like:
- initial operating expenses such as utilities, rent, payroll
- inventory and supplies to get started
- computer system, software
- fixing up your premises, office furniture, production equipment, delivery vehicle
- perhaps funds to buy an existing business rather than starting from “scratch”, etc.
In financing business, not all of these items require cash. Alternatives include renting or leasing and even barter or exchange.
And don’t forget the important questions in searching for business fundings that go with “how much?”
- When do you need it? Utilities are paid after the end of the month, except for a small deposit at the beginning. Payroll is incurred weekly or monthly. Rent is usually paid along with a deposit at the beginning of the month. Inventory can be built up gradually in some cases, and suppliers often grant extended payment terms.
- When are you going to pay it back? You will want to earn enough to start paying operating expenses from regular cash inflow. Inventory should turn over [be sold and replaced] several times a year so that you can typically sell it and collect for the sale in around 90 days. Assets like production equipment, delivery vehicles, computer system last longer and might take around 5 years to be paid off completely.
- What security do you have to offer?Also known as collateral, security is what a lender has to rely on if you don’t repay. It might be business assets and / or personal assets.
There are several ways to finance business. You may have sufficient savings to cover the startup costs, you can borrow funds from the bank or family or you can look for an investor. Keeping startup costs to a minimum is nearly always the best option and the lean startup is the most popular way to start a business in the current environment.
Every business needs to raise startup capital to get started, and there is a range of options out there for you to take advantage of. What’s available will depend on how much you need, the type of business you’re planning to run, and the level of control you want to keep, but essentially funding comes as four types:
- Your own investment
- Investment from others
- Bank Finance
Many companies mix and match their funding sources when they want to raise startup capital – an overdraft to cover day-to-day borrowing, a loan to buy equipment, and investment to provide a substantial amount to get the company up and running. Business financing always works easier if you lay the groundwork in advance.
If possible, get to know an independent loan consultant, before you need business financing. This will give your independent loan consultant an opportunity to get to know you and your business, how you think, what your goals are, what the financial situation of your business is. Building a relationship with a consultant you are currently working with can help them get to know the intricacies of how you operate your business.
Business failures or successes can hinge on you securing business fundings: you want to borrow enough that your company can reach its potential but not so much that you have severe difficulty paying it back.
It can be a mistake to pour too much money into your business at the beginning. A fair number of small businesses fail in the first year, so raising and spending a pile of money for an untested business idea can lead to much grief – especially if you’re personally on the hook for borrowed funds. Consider starting as small and cheaply as possible.
Loan consultants are a big part of taking loan responsibly. If you have limited capital and are searching for personal loans to expand your business, then loan consultants can set you up on a path that can get you a it in a quick and seamless manner. Loan consultants have close links with the best lenders in town and can help you compare various loans and settle for a package that best suits your needs. You should also find out about money saving tips.
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