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.
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.
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.
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.
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.