How much capital does your business need?
Don’t be a statistic. Don’t become one of the estimated 80% of small businesses that fail due to a lack of sufficient working capital.
There are many businesses you can start with very little funding or working capital.
It makes sense to use what you already have to start your business, and self-fund your business’ growth through operations.
Unfortunately, one of the biggest challenges for entrepreneurs is finding the funds necessary to launch their small businesses.
How much is ‘enough’?
It is very important to make sure you know what, and how much, you need to start your new business and keep it going.
If you have raised funding through an external source, and are forced to ask for more in just a few months or even a year, the chances are that the financier will not want to risk putting up more capital because it seems as if you, the business owner, have not planned properly.
On the other hand, if you ask for much more than is realistically required, financiers may believe that you only want to make yourself lots of money.
Determine your funding needs to avoid concerns about capital
If you have been following The Springboard Academy’s weekly blog advice, you have already created everything you need to determine the optimum amount required to get your business off the ground, and make it grow:
You have identified your market and calculated the sales you can reasonably expect;
You have worked out what it will cost to produce and/or sell your product or service;
You have determined your variable and fixed costs;
You have decided what equipment, machinery, vehicles and furniture you need, and have requested quotes for each item;
You know how many staff you need to employ and what you need to pay them;
You have completed your personal budget, and know what the company will pay you; AND
You have compiled your business budget, including your cash flow projection.
All the above factors will reflect in your cash flow projection, which, in turn, will indicate the amount you may need to borrow.
The largest negative – or cumulative cash flow shortage - is the amount you need to borrow.
Who do you ask for money?
There are many sources of finance, such as grants from government agencies, loans from banks and other financial institutions, Venture capitalist and family members.
Each one has its purpose, but not every option is suitable or available for your business.
Let’s look at an example. You may need R2 million in total; R1 million is for a property or premises, R500 thousand goes toward your vehicles, R250 thousand for machinery, R100 thousand set aside for office equipment and furniture, and the rest for working capital.
There are three different categories of assets to fund, and there are different methods for funding for each of the three categories:
The property will be funded over the long-term by a commercial property financier (usually over a period of 10 years),
The vehicles will most likely be financed over five years by specialists in vehicle funding,
The machinery and equipment could possibly be funded in the same way, but over a period of three to five years, depending on the life span of the item,
The working capital may be financed by a fixed term loan of three years, or may be funded through an overdraft facility.
Each of these categories will carry its own interest rate.
In certain cases, you might find a financier willing to fund all of your assets, but under separate agreements.
Where does one find these financiers?
It may sound strange, but every financier is not necessarily interested in your business. They also look to identify their niche in the market. Don’t make the mistake of approaching unlikely financiers, as you may be disappointed.
Here’s the good news. There are organisations that specialise in helping you find the right financier. Finfind links you, the business owner, with lenders that match your specific needs and leads you through a process to approach the most likely financier for your business.
You have almost all the tools needed to make your new business the best it can be:
A business plan that illustrates your goals and out-of-the-box thinking;
A cash flow projection that indicates your needs as well as the ability of the business to meet all its commitments;
Your passion for your purpose; and
Your positive, realistic outlook for the future success of your business.
*The final tool you require for your business, and your application for funding, is the legal form of your business.
**Check out next week’s post about all the legalities - sole proprietorship, partnerships, companies, non-profit organisations and trusts.