Starting a business is a tough job. Besides developing your vision, creating a comprehensive and airtight business plan, incorporating your business, finding a location, hiring employees, and getting your operations running, you’ll also need to find a way to pay for the entire adventure. Of the businesses founded in 2012 in Australia, only 50% were still in operation 3-years later in 2015.
Financing your business the right way is one critical factor in determining your business’ future success. The first and most important step in making good financial decisions for your business is ensuring that your business plan is extremely thorough. A really solid business plan makes it possible to determine what your financing needs will be to set up and launch your business. Doing this correctly is critical, because borrowing too little can cause dangerous cash flow interruptions, while borrowing too much means paying unnecessary fees and interest payments.
What kinds of financing to use
Small businesses have a lot of different options when it comes to financing, and the right option for you is going to be determined by the kind of business you’re running, and the opportunities that are available to you.
Debt financing is essentially any type of traditional loan. That means you receive money that you’ll need to repay with fees and interest. These will also generally be secured loans, so you’ll need to leverage some form of collateral to qualify. This can be especially profitable in the long run, because you retain full ownership of your business and the profits that it generates. Unfortunately, it also carries a lot of risk, because you’ll have to deal with the additional stress of paying back your loan while your business isn’t well established yet.
Unlike debt financing, equity finance doesn’t obligate you to pay your investor back either the principal, or any interests. Instead, the investor becomes a partial owner of your business. This is safer in the short run, because the investor shares the business’ risk, and you won’t have to deal with the financial strain of paying back a loan while trying to run your business. However, in exchange, your investor will be permanently entitled to a portion of the business’ profits. Moreover, they’ll have the right to take part in decision making for your business if they choose to do so.
How much to borrow
Regardless of whether you choose to pursue debt or equity financing, acquiring the right amount of funding is extremely important. Too little funding can seriously interfere with your ability to expand and grow, and too much can cause insurmountable cash flow problems in the future. There’s one very important thing to keep in mind, though…
Don’t overcommit your finances
A lot of entrepreneurs go in with big dreams, getting as much financing as they can qualify for, rather than what they really need. Buying or renting extraneous equipment and storage space, hiring an army of employees, or acquiring far too much stock is extremely risky. If your business doesn’t grow as quickly as you initially hoped, and you can’t service your debts while keeping your business running, your entire operation might collapse. Similarly, investors might lose confidence and take control of the business from you, or just stop providing funds and walk away.
Starting more modestly gives your business the opportunity to grow in the future. The trick is getting the right amount of funding to comfortably cover your costs for a lean, relatively minimal version of your long term vision that doesn’t sacrifice on the quality of your product or the efficiency of your operations.
Develop options for the future
By this point, your business is financially viable, but you won’t be able to realise your vision without growth. To be able to seize growth opportunities, you’ll need access to new financing in the short term. It’s important to explore these opportunities as soon as possible, so that you know exactly what you’re doing when it’s time to strike. A few great cashflow solutions to keep in mind for times like this are…
Business lines of credit
A business line of credit works essentially like a credit card, but is designed specifically for businesses and has a much lower interest rate. Lines of credit offer a great option for businesses that don’t know exactly how much money they’re going to need, and they’re relatively cheap because you only have to pay interest on the funds that you actually withdraw.
Invoice financing allows you to give yourself an advance on your own revenue. Instead of waiting for a client invoice to come due, you can sell it to Fifo Capital for most of its value, and they’ll collect the payment from the client themselves.
Stock loans allow you to purchase and ship the stock you need to accommodate a sudden spike in demand. These can usually be secured against the stock itself, so you can take this type of loan out even if you don’t have any other available collateral to use.
There are a variety of other options that you can use to facilitate growth without financially overcommitting your business. We strongly recommend calling one of our experts at Fifo Capital for a consultation, so you can be sure that you’re aware of all the options available to you and your business. Though it might seem tedious to tackle all these issues this early, it will make all the difference in the long run.