Irrespective of the type of firm you plan to start, whether it’s an IT consultancy or a void property cleaning company, it’s vital to have a comprehensive understanding of how much cash you need and the financial sources available to you.
Whether it’s a traditional loan from your bank, investment from loved ones and business partners, or a more unorthodox crowdfunding approach, your grasp of each method should be watertight. Of course, each funding route has its pros and cons, which is why the more you know about each, the chances of securing the most beneficial funding for your business increases.
Want to learn more about the fundamentals of financing? Read our top start-up tips below …
Determine How Much Funding You Need
In the first three years of trading, a start-up will spend more than it brings in – which means you’ll need sustained finance to see you through to the breakeven point. Initially, it’s prudent to draw up a budget and include all costs – equipment, rent, wages – in the projections.
Importantly, try to secure ALL of your funding in advance and avoid waiting until minor cash flow problems turn into a major issue. Why? Because your friendly bank manager may become apprehensive if, six months from inception, you turn up at his office pleading for more cash.
Choose Your Funding Route
Many banks are cagey about lending to inexperienced business owners without other forms of investment already in place. Consequently, many start-ups rely on cash from savings, loved ones and other investors to get the ball rolling.
For finance in the short-term, options include an overdraft from your bank, which offers access to working capital and means you only pay interest on the figure you’re overdrawn on. Long term, it’s prudent to arrange a loan with your bank for the expected life of the asset you’re purchasing.
Boost Your Credit
To ensure your investors are confident their cash won’t disappear into a financial black hole, it’s important to prepare a business plan and include a budget that outlines how much money you require, the reasons it’s needed and how you plan to pay it back.
You can use your business’s assets as security, although any equipment is typically valued at its auction price rather than the amount it’s actually worth. Also, beware of pre-existing funding (loans, overdrafts, leases), as they can slash the security you offer your financial institution.
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