Financing a New Business – What You Must Know

Posted by Credit Financing Guru

For anyone planning to put up a business, it is important to keep in mind that as much as possible, you should start it buy using cash or funds of your own in financing a new business. You can do this by starting small or slowly and even while you are still presently employed.

You can start a business by working hard. You can work during evenings and during weekends while keeping up with your current job. This will ensure you that you will still have a job even when the business will not come out as good. Other than that, you also haven’t acquired debt while you are financing a new business.

Sometimes however, other sources of funding might be required depending on what type of business you have. When you try to find out your financial needs, keep in mind that you have to do your planning in an organized way. Do not forget about other factors that might affect your business like disease, calamities or machine breakdown.

In preparation of financing a new business, remember these things: equipment, business license or permit, legal fees, salaries, advertising, office supplies, etc.

What any starting businessman should avoid is to obtain additional financing while on the starting phase. There are two types of financing: debt and equity financing. The first one means that you make a loan from anybody and you are compelled to repay the sum you borrowed. The latter one has something to do with advertising or selling a part of your company to another investor. In other words, you are not forced to repay the funds. Generally, this form of funding is given by venture capital companies.

Most small scale businesses will then to make use of debt financing because equity financing are only interested in lending huge sums of money. So we will talk more of the sources of debt financing as a way of financing a new business.

Here are debt-financing sources:

1. Own Savings. This is the best option for you if you have set aside some amount. You have to remember though, that you must have a separate and sufficient amount for cases of emergency.

2. Your Relatives. Usually, your family and your relatives the easiest people to lend money from. If you will be able to persuade or convince them of your business idea, they may be willing to let you borrow money. You also have to make sure that you have an official loan document which states your interest rate and terms of payment. Just make sure that you will be able to return their money in the agreed length of time even when your business fails.

3. Banks and Lending Investors. There are a lot of local banks that allow you to loan money for putting up a business. This move will involve a presentation of a legal plan that justifies the amount that you are planning to borrow from them.

4. Equity Loans. The interest rates for equity loan are usually low. Just be careful and remember that your home is at stake


Financing a New Business FAQ:

Question: What is the best way to obtain financing for a new business startup?
If you had a business plan but little cash, how do you acquire enough cash for your business?

Answer: You should not start a business if you cannot pay cash for it. If your business fails (and many of the new ones do) and you paid cash, you simply move on. If you borrowed money, you are left with debt you have to pay – possibly for a long time to come.

Also, paying cash will prevent you from making many mistakes you will make if you borrow. It is plain psychology: we think before paying cash and do it much less (or do even not at all) when we borrow.

So, if you truly believe your business plan is sound, save what you can, get an extra job, save more, then and only then start it. As it develops, reinvest part of what you make into it to make it grow.

Question: I need money financing for a new business and because of my ex I can not go to the banks or loan companies.
He’s totally screwed me over. Paying money back isn’t a problem. Any ideas? And I don’t mean debt consolidation etc.

Answer: You need to put together a firm and realistic business plan and use it for financing and/or grants. Do some research online for resources, then take a trip to your local library.

Question: What is the importance of financing for a new business?

Answer: All businesses need money. Start with capital – your own money or your investors. Financing costs interest. You can’t afford too much interest to start with.

Most businesses fail because of undercapitalization. Get enough startup capital to last at least a month and preferably 3-4 months.

You will have to buy things to get going, both goods and services. And you will need working capital to support your business until you start getting income.

So finance your business with capital if at all possible. Finance your long term fixed assets with a term loan if you need to. Get a line of credit so that you can have short term working capital as you need it but resolve to keep that line as low as possible and use it only when you need it.

The line could be at a floating rate related to prime. The equipment long term loan should be at a reasonable fixed rate, like a car loan or other capital equipment loan would be. You should pay that loan off prior to the end of the effective life of that equipment.

Question: Where can I find financing for a new business (I have no credit)? Can do approx 15 to 20 mill a year.
This is a new newspaper like nothing else on the market. Basically for those who ride public transportation.

Answer: What you need is a Venture Capitalist but they aren’t easy to please. You better do your research & homework. Have a Solid business plan before you start contacting them.

Question: Financing Question on opening a new business?
We have decided to start a small business. I favor a 75% debt (mixed short and long term) 25% equity financing plan, while my husband favors a 80% equity (some preferred, but mostly common stock) 20% debt (long term) structure. We will be opening a small chain of pet grooming shops including building, land and equipment, and pet products for resale. I have come to you for advice in settling the financing tradeoff struggle.

Answer: I would suggest speaking with a business consultant/accountant/lawyer in your area. I would ask for referrals from other business owners or check the phone book and web.

You will need to look at cash flow projections and credit ratings to determine how much debt your business can carry and how much equity you can raise.

Question: What is the best way to get financing for a new business venture?

Answer: To get a loan, you need to write a business plan. Go to the SBA website for instructions on how to write a business plan and sample business plans.

Go to the SCORE website and in the upper left hand corner, enter your zip code. On the next screen, you will get information on the nearest SCORE chapter. Call them and arrange for a free meeting with a SCORE counselor to discuss you business plan.

SCORE is a nonprofit association dedicated to entrepreneur education and the formation, growth and success of small business nationwide. SCORE is a resource partner with the U.S. Small Business Administration (SBA).

SCORE has 389 chapters in locations throughout the United States and its territories, with 10,500 volunteers nationwide. Both working and retired executives and business owners donate time and expertise as business counselors.

Question: What kind of company do I need to contact for financing for construction on a new business in the Caribbean?

Answer: Depends. If you have enough money to cover 30%-35% of construction cost, you can get bank financing for the rest. If not, you need to arrange equity investment first.

Question: How does one get financed for a new business idea?
I am looking for financing for an independent music label, but cannot seem to find resources for financing. I am looking for start-up finances, but all I can find are resources for small businesses that have already been active.

Answer: To get started, I suggest contacting the Small Business Administration Financing Page (SBA). Entrepreneur also offers a great site dedicated to money & finance. The SBA site has sample plans and instructions on how to write a business plan. Then, take the business plan to a bank.

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