Running A Business-Week 3–Money Matters
January 17th, 2008 | by Jeniffer |Making money requires money.
In order to begin to run your own business, you will need two kinds of capital. One of these is startup capital, which is the money needed for you to open the company, then keep it going long enough for it to begin making a dependable income for you. Many people recommend that this amount be enough to keep your company going for at least six months, although twelve is better.
Operating capital is the money you will need to keep the company going after the initial startup period. This amount must include salaries, overhead, expenses, supplies, interest payments, advertising, and wages.
Many people underestimate how much money they will need just to keep the business going in the early part of its existence.
A well prepared business plan will help you figure out how much capital you will need.
Start Up Capital
You can get startup capital from your own savings, investments, bonds, savings plans, taking out another mortgage on your house, or liquidating other assets.
You may also consider keeping your current job, and working on your company parttime initially, so that you are not relying solely on profit you may not make for some time at this point.
You can also see about borrowing funding from your friends or your family members, although this can be a tricky situation, especially if it turns out they are later unable to recover their loan. Always get loan agreements in writing to avoid potential misunderstandings and hurt feelings.
Even if you borrow the money from family members, you must set terms and a payment schedule. You must also pay them interest for the money you borrow, unless they, in writing, specify otherwise. Families may also be willing to wait for repayment until the business is profitable, but be certain to include this in the payment schedule as well.
Of course, there are banks and credit unions, to which you can apply for funding. Where I live, we have the Business Development Bank of Canada. Often, however, these types of lending institutions may only be willing to start you off with a personal loan, rather than a commercial one.
Be forewarned, most lending institutions consider new businesses a bad risk. This is because of the high failure rate among new businesses.
Operating Capital
Some lenders may make funding available in return for a percentage of the business. This is called equity financing. They then become either silent partners, shareholders in the company, or a limited partner, depending on the terms agreed upon.
You may also apply for debt financing, such as a line of credit, where you are charged interest for the money you use. It is very much like personal debt.
You may have to put something up as collateral for whatever money you need. This means that, if you are unable to repay the loan, the lender still gets something–often property or a house.
Make sure whoever you obtain funding from is kept abreast of developments in your company. Communication is vital in every aspect of running a business, and finances are no exception.
Whatever methods of financing you may use, make sure you keep accurate, complete records.
When applying at different financial institutions, make notes about the interviews you have with the loan personnel there, how you felt about the place, whether or not you would feel comfortable doing your business there, and any other notes you feel are important.
Be sure to write down the names of the people you have spoken to, and keep these for future reference, not only in case you need them regarding your initial transaction, but because you will need to know who you would prefer to speak to for any future transactions.
Also note the terms and conditions that are offered, and what types of commercial accounts are available, at what cost, to businesses.
The financial institution you choose will be with you for a long time after the initial loan agreement is reached.
What They Want to See From You
Lenders need to see that you have the ability to repay the loan, from business activities.
For this, you must prepare a financial plan, which is a part of your business plan (see below).
You must specify not only the amount of funding and term requested for it, but what you plan to use the funding for. Specify if the funding is to be used to cover fixed assets such as a building or renovations to a building, a vehicle, or if it is to be used for capital assest, such as machinery or equipment needed for the business, or, more likely, a list of both.
They will also need the contact information for any professionals you deal with, such as other lending institutions, lawyers, bookkeepers, etc.
You need to provide information which will support any personal guarantee, such as a net worth statement (for yourself, not for the company).
Copies of any potential orders, so that they know you have the potential to actually make money at the business.
Your wholesale costs, as well as retail pricing.
Appraisals of fixed assets, such as a building or other property.
The banker needs to know if, personally, you have paid your bills, if you can be relied upon, and if you have the ability to run a business.
They need to know your credit rating.
They need to know that the business is able to make enough profit that the bank will be paid back.
And they need to know if you have anything of value to secure the loan.
The Business Plan
You write out a business plan to serve as sort of a blueprint for your business. It tells where you see the business going, and helps provide the information necessary to gauge its performance in relation to expectations.
It is a requirement when you are looking for a loan for the company.
You begin with a cover sheet, including the company name and address, phone number, fax number, logo, owners’ names, titles, addresses, and phone numbers, date of issuing the plan, and the name of the person who prepared it.
Then you have what is sometimes called the Executive Summary, which includes the objectives of the plan. It tells what the company is, what your objectives are, if and why you need a loan, how much of a loan you require if you do require one, exactly how you will be successful, and an outline of your plans for repaying the loan.
You should include a table of contents.
Then you begin talking about the business, including the legal structure, history and future plans for the company, plus a description of your product or service and what you plan to accomplish in the next few years.
Your business location, including why you chose this particualr site, who manages your business and what about them makes them particularly able to do so (their qualifications, such as certification or experience in a certain area, etc), and who is working for you, their qualifications, and what you pay them to do their job.
You also need to know your accounting system, who does your bookkeeping, and how you will be able to utilize your financial records in determining direction and changes in your business.
As well, you need a detailed rundown of your insurance, and any information on providing security for the actual physical building and inventory of your company.
Then you must describe your marketing plan including who your customers are, why they would purchase your product or service, who your compeition is, etc.
You must include financial documents, including a cash flow statement (budget for the company), income projection for the next 3-5 years, and, if you have been in business for any time at all, a balance sheet, income statement, and a financial history of your company. These last three are not necessary if you are just starting out, as they refer to financial history.
Lastly, you will require the documents to support what the rest of your plan stated. These include resumes, a personal financial statement, any credit reports, any leases (copies) or rental agreements, and any letters of reference which will reflect that you are reliable and are a good risk for a loan.
Also include copies of contracts you may have, legal papers such as legal struccture, insurance titles, etc, and whatever other documents you feel may encourage the lender in providing that loan, such as advertising plans, etc.
The plan must look well prepared–check all numbers for accuracy, highlight main headings by bolding them, provide the title page and table of contents, spell check the entire document, and if possible have someone other than yourself go over it to make sure the wording is clear.
Make a copy not only for yourself, but also for whatever lenders you may be seeing.
Track where each copy goes to. If the company refuses your loan, get that copy back.
Links:
There are so many bits of information on these topics, I could it would take an entire website to cover them all.
In fact, it has taken several!
Happily, there are many places you can turn to for help and guidance in setting up your business.
Most of these include a detailed explanation of making business plans and how to get financing.
Please check them out if you are planning on starting your own business.
Researching what you must do each step of the way can be invaluable as you step out into the great entrepreneurial path ahead of you.
The following websites are particularly helpful.
The U.S. Small Business Administration.
They have a Small Business Planner to help you plan, start, and manage your business, as well as tips on how to get out of business if you find you need to. Find it at
http://www.sba.gov/smallbusinessplanner/index.html
Also check out the Ministry of Small Business and Entrepreneurship at
Canadian Business (www.canadianbusiness.com) is an online magazine filled with business related news (they also have a print edition).
For financial-related tips in particular, see “Dealing wwith Your Banker and Other Lenders”, at
http://www.canadaone.com/ezine is an online source with a complete checklist for starting a business, a Marketing guide, tools and calculators–lots of stuff to help you start off right.
Also, I found My Own Business (http://www.myownbusiness.org/) which feature what they promise is a free internet course, as well as some which they hope you will pay for once yhou see the ads for them. I did not take these courses, but their outlines look promising. If you try the fREE courses out, let us know how good they are and if they prooved free and helpful.
There is a very good, step by step guide to writing a business plan on About.com, at
http://entreprreneurs.about.com/od/businessplanoutline/Business_Plan_Outline_Step_by_Step.htm
While you are there, you may want to check out some of their other entrepreneurial offerings. They have lots of good information.
For information regarding startups, etc, you can also go to Business Link, at
http://www.businesslink.ggov.uk/bdotg/action/home?r.l1=1073858805+r.s=1
Finally, if you do not see what you are looking for in the above list, feel free to search for what it is you need on the search bar below (just type in the words “running a business”, or whatever description you like, and hit submit query.)
One final note: I have added the category “entrepreneurs” to the forum here, in case any of you who are considering beginning a business are interested in helping one another out.
1 Trackback(s)