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Financing Your Business with Start-Up Capital

September 3, 2019
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As seen in the Westchester County Business Journal and the Fairfield County Business Journal

You’ve written your business plan and completed your marketing plan. You’ve memorized your elevator pitch and registered your business under the appropriate business structure. Your product or service has been perfected and is ready for the market. Have you forgotten anything?

Oh, that’s right: Money, Moolah, Scratch. Whatever you call it, your business needs capital!

Financing is one of the most important aspects of your business. The ability to raise adequate capital may determine the fate of your business. According to the U.S. Small Business Administration, while poor management is most frequently cited as the reason businesses fail, inadequate financing is a close second. Many times it comes down to cash flow- companies have closed their doors because they couldn’t continue operations for another few months until the money came in.

Before you start, you must take a careful look at the type and amount of capital you need. Then, you must decide how you are going to finance the capital needs of the business. Last, but not least, you have to determine a source for the capital at an affordable cost.

THERE ARE FIVE QUESTIONS YOU SHOULD ASK TO DETERMINE HOW MUCH CAPITAL IS NEEDED:

  • How much do I need to start the business?
  • Do I have personal funds/assets to finance the start-up phase?
  • Do I have family or friends who are willing to invest in the business?
  • Do I have personal credit that will allow me to obtain lines of credit?
  • Do I have relationships with any financial institutions?

THERE ARE TWO TYPES OF CAPITAL:

Start-up capital: money needed to initially get the business on its feet – this might include capital for acquiring/leasing real estate equipment or for inventory.

Working capital: money needed for day-to-day operation of your business. How much working capital you need depends on the type of business you have.

THERE ARE ALSO VARIOUS TYPES OF FINANCING, WITH ADVANTAGES AND DISADVANTAGES TO ALL:

Debt Financing – this type of financing is where you borrow the money and agree to pay it back at an agreed-upon interest rate. Many businesses are funded with debt financing. If you pass the requirement of the lender, you may be able to obtain a term loan or line of credit. “Factoring,” whereby a business sells their accounts receivable to a third party, is another form of debt financing. Factoring is typically the most expensive option but, depending on your situation (new business, seasonal sales), it maybe the best or only choice.

  • Advantage- you don’t have to give up ownership and it is available to companies that can’t get equity financing.
  • Disadvantage - you must pay interest, and the lender will likely require personal guarantees.

Equity Financing – is where you sell partial ownership of your company. While debt financing is most common, there are thousands of companies financed each year by private or “institutional” investors in exchange for an equity ownership stake. They range from “friends and family” to angel investors and venture capitalists.

  • Friends and Family
    • Advantage – convenient, no-nonsense and available quickly
    •  Disadvantage - be ready for an ugly Holiday dinner if you lose their money.
  • Angel Investors
    •  Advantage - relatively patient about their investment
    •  Disadvantage - often difficult to find
  •  Venture Capitalist
    •  Advantage - investment smarts and networking in addition to money
    • Disadvantage - must be a start-up business that is interested in selling within 3-5 years, and must be prepared to share control

Whether your business is considering debt or equity financing, it is important to understand the factors that will affect a credit decision. These factors include the experience level of management; collateral; industry; ability to repay; and amount of funds required.

The choice of financing options is one of the most important decisions you will make for your business. Review your options and prepare your business properly so as to afford yourself the best opportunity to succeed.