Financing A Small Business Start Up
You have a great idea and a plan to go in business that you know will work. The first questions that need to be answered after the idea and plan that you have developed are;
How much seed money do I need and where do I get it? This is obviously an absolutely critical part of any business plan
It is important that the start up money is enough to carry you through to a cash flow level where expenses can be met. Management issues and inadequate financing are responsible for most of the failures of start up businesses. The challenge of a small business is to reach a balanced cash flow before you run through your start up finances
1. Getting Ready to raise the money needed
The first step is to go over each element in your plan and assume that something will go wrong each step of the way. Carefully think through each possible set back and figure what it will take to fix it in both time and money. If you really have a good idea and have planned carefully you won’t have a problem with every step. The exercise in planning will get you prepared for crises management which is very important, since the crises will inevitably be one you hadn’t even considered.
2.What kind of Money? Debt Finance or Equity Finance
Debt is easy to understand. You borrow the money from a bank or individual and agree to pay back at an agreed rate of interest in a certain amount of time. If things go well debt financing is the cheapest way to start. The problem is that banks and individuals are very tepid to the idea of lending to a small start up business
Equity financing has other factors to consider. The money you raise has a price tag that can often be a major headache. For the money you give an ownership position to the individual or company that provides the financing. This is a relief in that monthly or quarterly repayments are not scheduled but the wrong partners can often be at your door with advice and criticism.
Things to consider.
Debt financing needs a strong opening management plan. Financial institutions often show no signs of heart or understanding if you are late with a payment. If you are going to seek debt financing start with friends and family. Stay in touch and give straight honest reports as to progress and problems. Friends and family will cut you slack when those crises moments arise. With the right choice of friends they might even step up with helpful suggestions.
Equity financing needs some careful thought as to the equity partner being considered. It is helpful if you can find a partner that offers more than the money. An equity partner with relationships that can help your start up is the best kind of partner. It is also very important that you maintain control of your company and do not give up that 51%(or more ownership) position during those start up years
Credit cards are useful but dangerous.
If you need some money as a fill in of a shortfall for a few weeks or a month a card can help. If the money can be paid in 30 or 60 days from cash flow they can be safely used. If unable to pay before the interest kicks in they become a very expensive form of finance.
When you are ready to start, get your door knocking hand ready. You will likely hear a lot of, “not interested” replys. Listen carefully to the negative comments and use them to prepare for the next presentation. Remember that a No for now is not necessarily, No for ever. Don’t be afraid to go back to a No if you have developed answers and confidence. It has worked for me.
