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Financial resources for your small business
Before you can start your small business, you need to make sure you have enough money to get it up and running properly. You must determine your start-up capital needs along with your cash-flow requirements and determine how much money you need to store in cash reserves.
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Every business has different cash needs, especially when you reach different stages of development. Some businesses only need a small investment to get started while others need a large business loan to get started. Before you can launch you business you must determine your start-up costs. Here are some of the costs you need to know:
- One-time costs
- Cost of utilities
- Inventory costs
- Insurance expenses
Figure out which of theses costs are essential and which costs are optional. When you are outlining a business plan, you should only lists the costs that are essential to starting your business. These costs will include your fixed costs (overhead) and your variable costs. Fixed costs refer to your rent, utilities, and insurance. Variable costs are shipping, packing, inventory, and commissions.
Another important thing you need to have is your break-even analysis. This will help you figure out if you can cover all your costs and make a profit. Use your list of fixed and variable costs to calculate your break-even costs. Calculating your break-even costs can help you figure out if you have enough money to cover your monthly expenses and stay out of the red with your cash-flow.
Before you take your business plan to a lender, consider the following questions:
- How much money do I need? How urgent are my needs?
- How great are my risks?
- How will my capital be used?
- What is the current state of my industry?
- Is my business seasonal?
- Do I have a strong management team?
- What is my plan for future growth?
There are 2 main types of business financing, equity and debt financing. If you can invest more money or more equity into your business, lenders will be attracted to you. If you have a high ratio of equity to debt, it is best to seek out debt financing.
Equity financing is popular with some small business owners. Usually you have outside investors of others that are willing to provide you with money to get started. These individuals are willing to take on additional risk because they have a lot of money are called venture capitalists. They can include banks, credit unions, government-assisted sources, or wealthy individuals. Some investors will provide money to start-ups but they prefer to give it to a company that is already established and needs the money for growth. If you seek equity financing, you need to be prepared to relinquish some of your decision-making ability.
Debt financing is given by banks, commercial finances companies, and the U.S. Small Business Administration. While you may have some private investors that help you get started, normally the initial investment is made from your savings account. The banks are often the major source of small business funding, but they have tightened their funding regulations recently. Many of them prefer short-term loans and lines of credit so they can charge higher interest rates and make more money. Small business owners may have a difficult time getting a long-term loan from a bank as they do not want to take on unnecessary risk. To help, the Small Business Administration has developed loans that help banks reduce their risk by leveraging their funds. To get a larger loan, you may need to secure it with some of your personal assets like your home or automobiles. Using your personal assets is like adding insurance to the loan since the bank will be able to collect on most of the money if you default on the loan.
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