Ravi Chandran
Start your new business off on a strong financial footing. Experts agree it’s the best strategy for success
By: Hitesh Khan/
In fact while poor management is cited most frequently as the reason businesses fail, inadequate or ill timed financing is a close second. There are several reasons funding can be a major challenge for someone planning a small business:
- It can be difficult for an entrepreneur to put a dollar value on a new business idea.
- Some people who are eager to start a new business are not prepared to “talk money.” They either don’t know how to or don’t want to plan, research, ask for, consider choices, think about, and spend money – that is, business capital.
- They don’t seek the help of loan specialists who will help them find funding for their new business.
To get small business funding, you should start now to develop or improve your skills and gain the knowledge you need to “talk money.” It can be your most valuable new business asset.
Table of Contents
Start with a Good Look at Your Personal Finances
There are several important reasons to begin thinking about Funding Your New Business with a review of your personal finances:
- A new business seldom generates enough to replace a regular salary, at least in the beginning. Be sure you can meet your personal expenses with a minimum — or no — contribution from your new business.
- For every story you read or hear about someone who “used all my savings and maxed out every credit card” to start a successful new business, there are hundreds of other people who did the same thing – and after a few years of hard work, they had no savings, no credit, and no business.
You can avoid such bad luck story in trying to get small business funding by maintaining your personal financial health is the key.
When seeking small business funding remember that it’s essential to keep personal and business funds separate.
This may seem obvious, but you might be surprised at how often mixing personal and business funds becomes a serious issue for small business owners. The best idea, as soon as you decide to move ahead with your business concept, is to set up a separate business bank account.
The discipline you use to keep personal and business expenses separate will help you to avoid the “trickle out” theory where funds just seem to evaporate – or projects do not generate the profits they should.
Options for how to pay yourself for expenses and salary.
Many small business owners think of themselves as suppliers to their small businesses. Of course, you need to be paid for the items you provide to the business:
- space for a home office
- mileage on the car for business meetings
- electricity, and other utilities
One option to consider is paying yourself for any expenses above $100.
For example, if your total mortgage expense is $2,100 and you use one room of your apartment for your business, charge the business $300 rent and pay for it. You might combine the other smaller expenses in one bill for miscellaneous expenses, perhaps $200. Each month, you would receive $500 from the business for the use of your home facilities.
Any expenses you have made for the business, such as buying office furniture, can be reimbursed immediately or amortized (paid in segments over time). Again, write yourself a business cheque with a clear description of the expense.
What about a salary? It all depends on the cash flow your business is generating. You have to balance your financial requirements with the business needs for funds. Keep in mind that the less money you take from the business during the start-up phase, the faster your business will reach the break-even point, the more likely it will be to generate profits and be in a better position to get small business funding.
As a new business owner you can choose to get small business funding from several different sources including a bank, as well as private finance, and investment firms. Some people prefer to work with a single financial services provider, while others may want to use a combination of resources to meet their business financial needs.
Getting funding for new business is the biggest obstacle to starting a private enterprise for most people. When you calculate your startup costs and add in the amount of money you need to cover your personal expenses during the startup phase, coming up with money for a business can seem like an impossible dream.
The entrepreneur might have a great idea and clear idea of how to turn it into a successful business. However, if sufficient finance can’t be raised, it is unlikely that the business will get off the ground.
Raising finance for start-up requires careful planning. The entrepreneur needs to decide:
- How much finance is required?
- When and how long the finance is needed for?
- What security (if any) can be provided?
- Whether the entrepreneur is prepared to give up some control (ownership) of the start-up in return for investment?
The finance needs of a start-up should take account of these key areas:
- Set-up costs (the costs that are incurred before the business starts to trade)
- Starting investment in capacity (the fixed assets that the business needs before it can begin to trade)
- Working capital (the stocks needed by the business –e.g. r raw materials + allowance for amounts that will be owed by customers once sales begin)
- Growth and development (e.g. extra investment in capacity)
One way of categorising the sources of finance for a start-up is to divide them into sources which are from within the business (internal) and from outside providers (external). No matter how daunting seeking funding for your new business may be, remember that hundreds of thousands of individuals a year do find the money to start a business – and you find it best when you work with a loan specialist.
