A Quick Guide to Financing Your Start-up Business
The most important thing is to know your numbers!
Create a Budget
The first step to financing your start-up is creating a realistic budget based on your
business plan.
A budget
lets you make informed decisions about your spending and financial choices. It helps you evaluate the trade-offs between different expenses and prioritise based on your values and long-term goals. In addition, by following a budget, you develop financial discipline and reduce impulsive or unnecessary spending.
You should factor in your sales and expenditure forecasts and capital costs. You should also estimate your monthly cash position. Try to be conservative with your estimates in order to create a financial buffer in case you run into cash flow issues, struggle to achieve your sales targets or overspend.
Estimate Your Financing Needs
It is pretty common to make a loss in your first year, so bear in mind that your start-up business may not make a profit for two to three years after you launch.
Estimating the financial needs of a business involves a systematic approach that considers various factors and being familiar with your numbers.
Start by defining your business goals and identifying the resources needed to achieve them. Then, create a detailed business plan that outlines your company's mission, target market, products or services, pricing strategy, marketing approach, and projected financial statements. Your plan should include a sales forecast, expense projections, and cash flow analysis.
Guidance from accountants or bookkeepers and keeping your accounts up to date can provide insights and help you
to stay financially fit.
Create a Contingency Fund
It's essential that you create a safety net for your business should you run into issues. Ideally, you should be able to cover six months of expenses in a worst-case scenario. Not only will your
contingency fund act as a buffer to protect your business, but it will also help you to sleep more soundly at night.
Borrow When the Going is Good
A big mistake that start-up owners make time and time again is waiting to borrow until they really need the money. It's best to set up a business credit card and line of credit when the going is good and you are in a strong position to negotiate. If you wait until you're in a tough spot, you are putting your start-up's fate in the lender's hands, and that's not a situation you want to find yourself in.
When taking out a bank loan, you should inform the bank of the total amount you want to borrow, even if you don't need it all right now. There's nothing wrong with borrowing in stages, but if you unexpectedly request more funds shortly after you first borrow, you might cause your creditor some concern.
Consider Short-Term Borrowing Options
A business credit card or an overdraft may help you overcome a financial shortfall. However, it's important to manage them both carefully in order to avoid debt and maintain a good business credit score. Remember that these options are for short-term borrowing only to smooth over cash flow issues but are not suitable for long-term use.
You may want to consider reviewing your terms of payments if you find yourself regularly in the red at the end of the month.
Consider Long-Term Borrowing Options
You should not use a credit card or overdraft for long-term financing and should instead consider more suitable long-term options. For example, besides traditional business bank loans, it's worth looking into equipment loans or leasing.
Final thoughts
There is a lot to think about when it comes to financing your startup business. However, by creating a realistic budget and a long-term plan, you can then set about gathering adequate funding to cover your costs.
Overall, financing is crucial for a business's survival, growth, and success. It provides the necessary resources to start, operate, expand, innovate, and navigate challenges effectively, ensuring the business remains competitive and sustainable in the long term.
