How much will I need to start a business and how to get the money?
The purpose of this article is to provide certain understanding regarding the initial capital funding options, and the different ways which can be utilized to obtain the funding.
Efficient cash-flow is the life blood of every business, regardless of whether it's a sole trader or a transnational business conglomerate and without it, the business will be unsuccessful. One of the main factors that cause business bankruptcy is poor cash flow and the explanation for this may be because the limited cash flow that the company has is the reason why they might be required to obtain financing from alternative means such as a bank or investment company.
If the company owners decide to raise alternative funding for their business through the use of external ways, it's important that they thoroughly analyse the possible choices along with the likely downsides.
What amount of initial capital is sufficient?
Determining the amount of money that will be needed for the start-up of your business is an important aspect ensuring that you will not place yourself in a vulnerable situation in financial terms, as inadequate capital is likely to suffocate the flexibility of the firm to advance and progress. On the other hand an excessive amount could possibly result in pushing away creditors and accumulating unneeded and preventable fees.
Factors to consider
To successfully and precisely determine the sum of the start up capital your business will need, it's essential to analyze both the business costs which are going to be incurred even prior to making the very first deal and the month-to-month costs including wages, insurance costs, taxation, rent etc.
The start-up capital will be needed to pay the primary expenses, for example to buy materials, to pay deposits for renting properties, the price of supplies or products, perhaps a manufacturing area or office along with equipment etc.
Keep in mind, that you'll be probably competing many other, better established businesses throughout the industry where you take part in and you may also need a capital far advertisement.
Even though you may have estimated the rough figure of the start-up capital you will need, as an added precaution, it is recommended that you have an additional amount of money on top of that figure, perhaps 20 - 25%. This additional money is going to be a buffer reserve that you will have available and within convenient access that can be relied upon just in case of sudden payments or expenses that might surface for unsuspected reasons.
When you've determined the general level of initial capital you will need for your business, the next aspect to consider is the actual acquisition of the wanted capital. Here are a couple possible options.
Business loans and overdrafts
Advantages of the use of business loans and overdrafts
The repayment period of the borrowed funds may be prolonged over a longer time period to make sure the cash-flow of the company does not suffer negatively as a result.
A business loan will provide the company with the essential start up money in a reasonably short period of time, permitting the business operations to begin in earnest.
Once the business loan has been given, the company owners are free to use the borrowed funds in any way they wish.
Disadvantages of making use of business loans and overdrafts
After the time period of the loan, the amount of money accumulated, either as part of a business loan or an overdraft, will have to be returned to the loan provider together with the added interest.
In case the company that has accumulated the loan is incapable to comply with the conditions and terms of the loan agreement, the loan provider could confiscate assets of the company in recovery of the debts. As a result the efficiency of the business might be compromised, making it harder to generate similar amount of merchandise or to provide the same quality of service which was formerly accomplished and experienced. In addition, the company's credit score could be reduced, it would be more difficult to obtain a loan in the future and might be asked to pay higher interest rates due to the degree of risk that the business is considered to experience.
Positive aspects of debentures
Debentures deliver the highest level of ultimate power and control for the company owner, considering that debentures are similar to shares but without the linked voting rights connected to them. In other words the company owner is free to take business actions without consultation or intervention with or from the debenture holders.
If the earnings of the company are in the black, the business can then purchase the debentures back as a way to get rid of an outstanding financial commitment.
Downsides of debentures
Debentures are usually handled and valued at extremely high denominations of currency which means it has the result of pricing them well out with the convenient price range of most regular people. As a result this decreases the pool of prospective investors substantially.
Debentures are as well usually considered being risky to investors due to the fact that in case of bankruptcy of the business, they rank less than other kinds of stakeholders particularly shareowners.