Choosing The Right Business Finance

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Yellow Belt
It's impossible to start most new businesses without some finance in place. You might need to purchase equipment, pay rent for premises, pay staff, purchase supplies and so on.

There are different ways to get finance, and often new businesses will use a combination of means.

What are your financial requirements?

When you start your business you need to be able to forecast how you will operate your business, along with financial forecasts (business plan). Without a business plan you won't have much idea about the direction you are going in, have control over your business, and whether you are achieving your targets.

Also, without a sound business plan your bank is unlikely to listen to you. You have to be able to convince your potential source of finance that you know what you are doing, that you can plan ahead. They are risking their money, and you need to be able to show that you are worth 'investing' in.

How much and when?

You'll need to calculate the initial start-up costs, along with your running expenses. You'll have bills to pay from day one, but it could be weeks or even months before you get any money from your customers coming in. That gap somehow has to be bridged until cashflow is steady.

You no longer receive a wage from your employer, and being self-employed can put some strain on your own personal financial situation. So, be realistic in assessing how much you'll need to live on for several months, perhaps six or more.

New businesses rarely make a profit in their early stages. Some even make an initial loss, perhaps for weeks, months, or even a year or so. Are you prepared for that happening?

Which financial option?

Basically this can be split into three - What kind of business you are starting, how much money you need and what you will use it for.

* If you can't convince anyone else to lend you money or invest in the business then you'll have little option other than to use your own savings or personal borrowings to fund the business.
* You could seek financial backing from family or friends. But, if the unthinkable happens are you prepared for the fact they could lose their money if your business is not a success?
* You may be able to convince a bank to borrow extend credit, either shorter term in the way of an overdraft, or by a loan for perhaps longer-term finance, or for larger purchases. Again, you need to have a clear vision so that you can show in a clear way how you expect to repay your borrowings.
* "Business angels" are sometimes willing to make larger investments for a slice of your business.
* Grants may be available in some areas, if you are setting up a business in a deprived area for instance.
* If your business is setting up in a deprived area, or in a sector that is not normally catered for by mainstream lenders, you might be able to attract finance from a community development finance institution.
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