How to Finance A Startup Business

This is not any kind of self promotion article related to How to finance a startup business. In this article you will get in know some ideas to startup business. So if you were finding some relevant information’s related to How to finance a startup business on GOOGLE then you have come to the right place.

Business Finance

Finding The Money You Need. Before Business finance is the major factor in any business. Whether you are lucky enough to be able to fund it from savings, using personal finance to get started on a small scale (or if you are looking for banks, venture capitalists, business angels and loans for SME’s or Corporations. You choose an option, it is important to explore all of the options before you make an educated choice.

Each of the financing methods provides positive and negative aspects. For example, funding from your own source gains you outright control over the venture; however you equally carry the brunt of the risk… Whereas using external financing methods such as banks or the venture capitalists may result in handing over some control of the business as well as a portion of the assets and profits – equally the repayment costs can vary enormously from banks on an upward scale to the more expensive financing of the business angels and venture capitalists (who require increased rewards since they take risks on businesses that other financiers will not touch).. All these aspects require careful consideration before you choose which option is best for you.

Personal Savings

Personal savings: Personal savings and other kinds of personal resources are the major source of funding for most new firms. While credit cards are often used to finance business needs, there may be better options available, even for very small loans – Look at the APR – see how much you are repaying (the best option of all is 0% interest!).

Friends and Relatives:

When launching a firm, many entrepreneurs turn to private sources such as friends and family for funding. Often, money is loaned interest free or at a low interest rate, which can be beneficial when getting started, look to offer an incentive to reward when the business is established.

Banks: The most common source of funding, banks will provide a loan if you can show that your business proposal is sound and you have done your homework. Banks make money by lending money. Banks, on the other hand, frequently decline loan requests due to the inexperience of many small business owners in financial affairs. You must be well-prepared and planned in order to receive a loan. You must know exactly how much money you need, when you need it, why and how you intend to repay it. Users has to be able to persuade your lender that you are a good credit risk, which requires a high credit rating.

Venture capital/Business Angels firms: These firms help very high potential companies grow in exchange for equity or partial ownership. National or International businesses are of interest to them usually with higher risk strategies and higher rewards. Ensure your business projections and future plans are solid and achievable before you approach them for funding! Cash flow: The main key to any business is the funding and cash flow. Whichever category you fall within, you will still need working capital to get started. Many businesses have dissolved due to poor cash flow, since although on paper a business is wealthy; it has no cash readily available to pay the debtors. It needs to be cash rich from sales in order to pay suppliers on time, to keep a healthy circulation of money/capital in and out of the bank account & stocks/supplies to grow the business. When projecting cash flow and sales figures, always be conservative in your estimates – optimism is great in business however in this field, always air on the side of caution and allow for unforeseen delays… Not all of your debtors will pay in the timeframe you stipulate on orders; therefore having cash in the bank account to allow for this will stop the creditors from holding back future credit… Reducing interest payments and other costs: The interest payments of the business may be reduced in the following ways:

Franchise – Opening a Business Franchise such as Spar or Dynarod, which will instantly give an air of professionalism and establish a firm basis on which to negotiate more favorable terms with the bank and investors.

Negotiations with the bank manager – When the business is in a strong financial position, renegotiating loans and mortgages will be of benefit to the owners, since lower interest repayments will help in the overall success of the business by freeing up cash which can then be used more advantageously. For a Sole Trader or Partnership just starting out, preparation is needed in providing a multitude of financial statements and evidence to show the viability of the business, the sound financial background of the people requesting the reduction, the professional manner to which they have run the accounts until the present time and the amount of capital they’ve banked and will bank in one’s lifetime. A strong confident manner is essential as well as a comprehensive plan of action.

Accounts – Within an established business, the last 3 years accounts will be needed to indicate the profitability of the business and the manner in which it has been run. The necessary paperwork to show projected future accounts is also a highly useful tool when negotiating terms to persuade the bank that the business has a healthy future with increasing turnover and profits. Loans should not be in excess of 65% of the value of the company and have collateral or security to guarantee the loan prepared in advance, in the form of land, property, and the standard methods of collateral. The nature of the business can be a major influencing factor since standard businesses are much more likely to receive favorable terms than a business of a highly specialist nature, with a relatively low customer base.

Other lending options: Commercial/Clearing Banks – These are the high street banks such as Lloyds, Nat West, Midland, Barclays and TSB. They offer services for personal and business banking. The banks do not usually pay interest on most current accounts; in fact they usually make charges for running the account (most offer free banking for the first 18 months or a year if the account stays in credit).

There are however other types of account on which they will pay interest like savings accounts and some are instant access, this will put the unused capital to maximum use and help increase profits. It is important to shop around since the rates vary immensely from 0.5 -1% on balances up to £1000 with most Banks to 3 – 4.5% with the smaller mutual building societies. The longer time period the capital is tied up for the better the rate of interest on offer.

Credit Cards – Paying for goods on credit will lower costs/interest payments in the short term, as it allows instant interest free credit for up to 60 days (with most cards, however the small print should be checked as some cards charge interest from the date of the transaction), hence giving the business the opportunity to sell the merchandise before payment is due. Trade Credit – Trade credit lowers the costs of the business by also offering a credit period for which the business has the opportunity to sell the products before payment is due. It has to be remembered however that just as suppliers offer credit to the business, customers of the business will usually expect a similar kind of arrangement. To stop potential cash flow problems, it would be wise to arrange the best possible terms for credit from suppliers and give less favorable terms to debtors to help the cash flow stay liquid.

Bad Debts/Cash Management – An efficient invoicing system and accounts department for chasing up slow and bad debtors will lower the costs of the business and help maximize profits. Also a more efficient cash management system for issuing speedier invoices and collecting outstanding debts quickly will lower the costs incurred. Financial Advice – Financial advice will be available from a multitude of different sources, including Local Authorities, Accountants, Solicitors, Banks, Building Societies and Independent Financial Advisors.

The level of advice required will depend on the knowledge and resources that are already available to the owner. It is advisable to consult advisors on all the aspects of business startup and lowering the costs of the business/interest charges, because frequently there are loans, accounts etc. available which are not known to the owner and can therefore prove to be a costly mistake. They can also provide details of the company’s performance, market trends, market competitors another important information needed to make such vital decisions. The Chamber of Commerce may have specialist advice for the business and may be able to arrange assistance in the form of a grant or aid (i.e. EU funding or the Princes Trust).

%d bloggers like this: