Raising finance for your business start up is a crucial aspect to cover.
As an owner its imperative your very clear about your options and approach.
Calculate exactly the amount of startup capital you need to launch and run your business. There is an estimated 2.2 million small businesses in Australia alone. Around 80% of these acquire their startup capital funding through bank finance, credit cards and other lines of credit.
Capital refers to the money which will finance your business and there are two types of capital: Debt and Equity. Some points you should consider before opting to choose are:
- Do you have a good personal credit rating or other lines of credit at your disposal?
- Do you have close friends or family who are willing to invest?
- Do you have money of your own to invest in the business?
- Do you own any assets which are required in running the business?
- Have you correctly estimated the funding requirement?
With equity investment you can make use of investor’s money in return of extending them a share in the business. You need to be careful about how much share you are willing to give up. If you sell 51% of your shares, the control of the business is lost.
Debt refers to the source of funding which you acquire having a rate of interest applicable on it. You need to pay back the borrowed amount plus the interest which applies to it.
Startup capital can be approved by applying for government grants. A grant is taxpayer money which the government specifies to encourage specific businesses and industries. It does not need ot be paid back. Some obstacles in acquiring a grant are:
- Available for specific groups or industry
- Grants are limited
A loan from the government is another source of obtaining the funds you require. You can apply to several loan programs at one time but be sure to take help as the loan requirements may vary.
Also called personal loans, these are the second most opted source of startup capital finance from a bank.
Long term Loans
These are used to finance assets which will be used for a period of more than one year, like machinery, building, and property. This type of loans is secured by new assets or personal guarantees.
Short term Loans
Short term loans can include credit cards or revolving credit lines. Not generally intended for startup capital, however these are acquired for financing day to day running expenses like, inventory or payroll and can charge a higher interest rate.
Requirements for Loan Approval
The following requirements are considered by potential lenders to approve your loan application:
Cash Flow: this refers to your ability to pay back the borrowing amount. It is measured by the cash flow forecast made during your business plan
Collateral: the dollar amount of the assets that you pledge as assurance for repaying your loan.
Commitment: potential lenders see your commitment to your own business before lending you any money. It is your personal money portraying your faith in your start up.
Character: this is your credit rating score calculated by your history of borrowing and repayment with the financial institution. A good score significantly increases your chances of securing a loan.
Do not ever under capitalise your business funding as it could cause a bump in between your business and it may be difficult to tap into another source instantly.