How Do I Finance My Business?

Finance My BusinessYou have a great idea for your business and you have found the best place to locate it. You know who will buy your product or service and you know who your competitors are. But starting and running your business is going to take cash, possibly a lot of cash.

Working capital, otherwise known as cash, is the oxygen that keeps your business breathing. Without enough working capital, your business’ vital functions will fail. It won’t be able to meet its daily requirements for living, such as purchasing supplies, paying rent, and paying salaries. In a word, before creating your business, make sure you will have enough money to keep it alive. The NX Level Guide for Business Start-ups (February 2002) states that inadequate capital is the most common reason given for the high failure rate of small businesses.

Where are you going to find the funds to start and run your business successfully?

There are several steps to take to ensure that your business will have enough capital to start and continue running.

1) Complete your Business Plan

The Business Plan includes a section about Financial Matters. Within this section, you will tabulate financial data and projections related to your business.

The Financial Plan portion of the Business Plan includes: a) Start-up Expenses; b) An Estimate of Future Sales; c) Estimated Cost of Units Sold; d) Fixed and Variable Expenses; e) Cash Flow Projections (very important); and f) A Break-Even Analysis.

2) Determine how much capital you will need to start your business and keep it running. Based on the estimated projections contained within your Business Plan, you will be able to determine how much money you will need, both to start your business, and to keep it humming.

3) Determine how much cash you have available through personal sources that you are willing and able to use to fuel your business. (Personal sources include: savings accounts, insurance policies, stock and other investments, second mortgages, and donations from friends and relatives.)

4) Figure out how much money you will need for the business after you have contributed all of the personal funds that you are able and willing to contribute.

5) Find a source for the remaining needed funds. Other sources include:

a. Debt. Debt is a loan made to you or your business. Sources of debt lending include banks, credit unions, federal lending programs and state financing programs.

b. Equity. Equity is ownership rights and privileges in your business that you give away in return for capital. Businesses seeking this type of financing must become a Partnership, Corporation or Limited Liability Company.

c. Alternative Funding. Alternative means of funding include: suppliers who provide concessions, such as extended payment periods and discounts; and grants.

6) Prepare a written Financing Proposal.
The Financing Proposal is used to secure loans and equity financing. Before preparing the Financing Proposal, complete the Financial Plan portion of the Business Plan. This section of the Business Plan will contain much of the information and data you will need for the Financing Proposal. The Financing Proposal contains the following: a) Cover Letter; b) Summary (contains the purpose of the financing, amount and terms requested, how the funds will be repaid, and collateral); c) Details on how the capital invested or loaned will be used; d) Details on Collateral (if seeking a secured debt); e) Information on the financial return for investors (if seeking equity financing); and f) Your prepared Business Plan (Financial data and projections are particularly important).

If you follow the steps above, you will equip your business with the cash it needs to breathe, both at its creation, and into what will hopefully be a long life.

For additional information on financing: (Small Business Administration) (Tips on Financing) (Virginia Small Business Financing Authority) (REDC Community Capital Group)