Financing your start-up can be one of the toughest things to do when you’re trying to get your idea off the ground. But without the funding, you won’t have a business to manage. You need to figure it out before you begin. A solid financial plan will help you get a grasp of the risks at hand, the amount of money you need, and when you’ll be able to get your money back.
Here are some ways you can finance your business early on and what other financial aspects need to be considered before raising funds.
Short-term Financing
Short-term financing is typically something that you pay back in a year or less. It can be a line of credit that someone lends you or a trade credit deal between you and your supplier to fund purchase orders. It is a good source of money if you’re short on cash to pay for certain operational costs, like packaging or products that you suddenly don’t have enough money to produce.
Trade credits between you and your supplier are beneficial when you’ve built a relationship with them so that they can trust you enough to give you all of your supplies on credit. Line of credits, on the other hand, are not as easily attainable as they used to be.
Just be careful when you’re looking for a short-term source of finance. The urgency may blind you to some fine print when you enter an agreement. Make sure to do a thorough read of the terms and carefully assess if you can meet the terms without incurring a great deal of interest on your end.
Long-term Financing
Long-term sources of finance are those that you can apply for with lower interest rates and hold on to for a longer period. They can get a bit more complicated than short-term financing, so you might need help to process certain applications, like mortgage loans. Having an asset as stable as a home will gain you credibility when you apply for other loans to further finance your business.
For example, Daymond John of FUBU will always be grateful for his mom, who took out a loan by putting their house on the line. His mother took the leap of faith that pushed him harder to be the successful entrepreneur he is today. Long-term financing may be a risky way to fund your main total capital investment.
Still, some prefer it because you’ll be able to borrow more money at a lower interest over a longer period, as mentioned earlier. Again, make sure you go through the terms as specific as you can and that you will be able to make your payments on time.
Payback Period
If you’re planning to get investors on board, you need to be able to inform them of the payback period. At the same time, as the proponent of the start-up, you should know how long it will take for you to start making a profit. The payback period measures the time it takes for your venture to earn for its investors.
They put money in your business to earn passive income (unless they’re working on the company with you). So whenever you’re pitching to potential equity-holders to raise financing, you must provide them with the numbers.
Informing them about your payback period, margins, price studies, and the other investors can help raise your valuation and maybe even reduce the equity they ask for. Whatever the reason behind your fundraising round, having all of this information on hand will garner interest and maybe even hunger for their piece of your pie.
Once you’ve determined how to finance your business, you can reassess your goals accordingly, looking towards minimizing debt as much as possible. You will also be able to look into how viable your business model is and if it’s worth taking all the risks involved during the financing stage of your project.
In instances where the initial investments seem too large, check the estimated expenses of the business and find out how you can cut them down without sacrificing the quality of your intended product or service. It’s good to spot these early on. That way, you won’t have a lot of your capital go to waste and, as a result, borrow less money with possibly a lower interest.