The thing about clichés is that they are often true. This is certainly
the case with the old chestnut, "You have to spend money to make
money." It is one of the hard truths of the world that no matter how
wonderful your business concept is, no matter how solid your business
plan may be, no matter how good you are at the work you want to do;
without funding for your new business, you will not get anywhere. The
issue is not simply getting money. The issue is finding the right
amount of money from the right sources at the right time. Failure to do
this is actually one of the reasons half of all new small businesses
fail within the first four years.
To find start-up funding for
your company, you must consider both the details and the big picture.
You need to determine how urgently you need capital, or start-up
funding. How much do you need to launch and run your business and how
soon do you need it? You must also decide how much of your own
resources you're willing to invest as well as how much financing you
plan to pursue. You have to know if potential lenders and investors can
realistically be compensated for the amount of risk they would assume
by putting money into your business. Is your business steady or
seasonal? Will potential investors be confident in your management
team's ability to run the business? You also need to determine the
developmental stage your business has reached and the funding sources
and amounts that are most appropriate for that stage.
Determining Costs, Needs and Resources
to the Small Business Administration (SBA), start-up costs include all
the expenses you'll incur while getting your business' doors open. They
include both one-time and recurring expenses. A one-time expense could
be for equipment or signage, while recurring expenses include things
like rent and utilities. Specific start-up costs depend on the type of
business you're opening, but there are some common categories-some
necessary and others optional-that cross most business types. They
Space to run your business (office, storefront, manufacturing, warehousing)
Office equipment and supplies
Utilities (electricity, heat, water)
Communications (phone, Internet, mobile)
Marketing and advertising
Payroll (all the individuals it will take to run your business)
Legal, accounting and insurance services
Cash Flow Needs
is the liquid funds available for obligations such as payroll and
supplier bills. Cash flow is the movement of cash in and out of your
business and it is something you need to plan for. In basic terms:
Being cash flow negative, means that you lack the cash required to pay
your bills, while being cash flow positive means you have money left
over after paying your expenses. As the owner, it is your job to make
sure that your business' cash flow remains positive. Cash flow is
usually divided into three components:
Operating cash flow, or working capital, is the money generated and spent from within your business.
cash flow is money received from external sources, such as bank loans
or outside investments, as well as the money you pay out to those
Investing cash flow is money from non-operating activities
such as funds in an interest-earning money market account. The interest
earned would be part of your investing cash flow. Money spent for a
one-time purchase of a large fixed asset might also be considered
investing cash flow.
Investing in Your Own Business
one thing all potential investors and lenders want to see is your own
financial investment in your business. It shows your willingness to
take the same risks that you are asking of them. To determine how much
you will personally invest, you have to consider two competing issues:
First, the more you invest, the easier it is to get financing; and
second, the more you invest, the more personal risk you assume.
Investors and lenders like to see you investing your own funds, and it
is common for them to require that you personally supply at least 20
percent of the funds required to start your business. On the other
hand, when it's your money getting invested, you could stand to lose a
lot of it. Remember, you are the only person who can decide how much of
your own money you're comfortable investing.
The Right Kind of Financing for You: Debt vs. Equity
is one thing to determine how much you need and quite another to figure
out what kind of financing you want to use to get it. Essentially,
there are two basic types of financing: debt and equity financing.
According to the SBA:
+Debt capital is represented by funds
borrowed by a business that must be repaid over a period of time,
usually with interest. Debt financing can be either short-term, with
full repayment due in less than one year, or long-term, with repayment
due over a period greater than one year. The lender does not gain an
ownership interest in the business and debt obligations are typically
limited to repaying the loan with interest. Loans are often secured by
some or all of the assets of the company.+
+Equity capital is
represented by funds that are raised by a business, in exchange for a
share of ownership in the company. Equity financing allows a business
to obtain funds without incurring debt, or without having to repay a
specific amount of money at a particular time. (sba.gov)+
problematic situation-having to sell a piece of your business-may be a
real benefit for you. By sharing ownership and the risk of your
venture, your investors have a vested interest in your success. In
addition, these people are usually business veterans with a great deal
of practical experience and insight. Because of this, they are often a
great source of input, advice, and assistance in launching and
operating your business. Giving up some control and a percent of future
profits is usually a cheap price to pay for the kind of help these
industry pros can offer.
Determining Which Way to Go
whether you want to go the debt or equity route, there are some
questions you will need to ask yourself about your business, your
situation today, and how you see your business tomorrow:
Can the business be self-financed?
Will the business generate enough cash flow to cover the repayment of your debts?
Can you provide the guarantees required to secure debt funding in the first place?
Are you interested in spreading the risks and rewards of your business?
Is your company already in a lot of debt?
Making it Happen
the end of the day, getting the money you need to start and grow your
business comes down to three basic things: the right amount of money,
the right sources of money and acting at the right time. Make sure that
you have a solid business plan and don't be afraid to get the help and advice of a good
broker or business attorney. They can be helpful in finding contacts
and preparing you to meet with them, but their advice is vital before
entering into any agreements. Finally, understand that this process
will take time. Depending on the sources you are trying to tap, it
could take months and sometime years. Be patient and remember a dream is a goal not yet achieved.