Unfortunately for all entrepreneurs, great ideas don’t make money on their own.
So while you may be an excellent architect, florist or personal trainer, starting a business needs more than your primary skills. Setting up and securing finance for your great business idea isn’t as simple as heading to the bank either.
With a little preparation and foresight, however, it’s possible to get your business off the ground. Here are our tips for the best ways to inject cash into your start-up.
Be prepared. Make a plan
Before you even consider applying for cash you need a sound business plan.
Wayne Milner, general manager, employer banking, at ME Bank, says that having a plan is “critical” to have any chance of applying for start-up finance from a bank.
“The higher the quality and rigour of your business plan, the more likely your chances of success,” Mr Milner told The New Daily.
At a minimum, your business plan should contain a thorough SWOT analysis (strengths, weaknesses, opportunities and threats) but should also include a financial assessment, an overview of the terms of trade and your credentials to qualify you to set up and operate the business.
“The financial assessment should include the projected cash-flow for the business and should be developed in conjunction with an independent expert such as an accountant,” Mr Milner said.
“Arranging for an independent expert to sign off on the financial assessment provides greater rigour and increases its credibility in the eyes of the lender.”
How much will you need?
Once you have a business plan in place, you’re likely to have some idea of just how much money is needed to get your businesses running.
Business Victoria, an online resource for entrepreneurs backed by the Victorian state government, warns potential business people to be realistic – “don’t be cut short”.
What are your start-up costs? Depending on your business, your finances will need to cover fit-outs, websites, equipment and assets.
Figure out the recurring costs necessary to maintain the business, such as wages and rent. Then work out your cash-flow – the amount of money expected to move in and out of your business over a given period. (Handy tips for that here.)
You’ll need to know if the money will be used for short-term funding of working capital or long-term funding for assets.
The final thing you’ll need is some security to offer any potential lenders.
Where to get the cash you need
Now you know how much money you need, where do you get it? There are likely to be two sources of finance you’ll consider – equity (getting investors to contribute funding for your business) and debt (securing a loan from a bank or some other lender).
Debt can be accessed through banks and other lenders. You’ll need to consider short-term options like credit cards and lines of credit, as well as long-term borrowing for investment and assets. For a full rundown of the alternative loans and providers check out this handy list at Business Victoria.
One of the benefits of equity over debt funding is that your investors will share the risk if the business fails and reap the rewards if it succeeds. They have a stake in your project.
Here’s a list of potential individuals what organisations you could approach for equity investment:
• You: Your first point of call is, obviously, yourself. How much have you saved to invest?
• Your family and friends: Many businesses look to people they know to raise finance. But this option is not for the faint-hearted – while loved ones may provide funding on more generous terms than outsiders, there’s potentially a world of pain in store for both of you if things go wrong down the track.
• Your business partner: If you don’t think you can run your business by yourself, you might want to consider bringing in a business partner to share the load. However, make sure that you choose wisely. First and foremost, it’s important to team up with someone who shares your goals and working style, as these issues can become conflict flash-points when the pressure of running your business starts to hit. In addition, it’s often a good idea to join forces with someone who has complementary skills to yours – for example, if you’re a sales and marketing whizz you might want to join forces someone who’s strong in finance and administration (or vice versa). You can find more information on choosing a business partner here.
• A business angel: These are wealthy individuals who are looking to invest in new businesses. Private groups are generally willing to invest up to about $2 million, so they’re worth hunting down and sounding out.
• Venture capital: A venture capitalist will typically seek to exit your business in three to five years with a minimum return of 35 per cent per annum. They’ll generally look to invest between $2 million and $10 million, depending on your business.
Depending on your industry, you may be able to apply for a government grant to help you out.
One example is the small new business loan – despite the name, however, it’s actually easier to apply for this once your business is up and running. These loans are either directly provided or guaranteed by the government, giving you access to cash at a lower interest rate than a loan from a bank as a general rule. You can find more information on applying here.