What are the different ways to raise finance for my business?
What is a business angel?
What is venture capital?
How do I contact business angels and venture capitalists?
How can I get venture capital?
What is working capital?
What is the difference between short, medium and long-term finance?
How do I apply for a loan?
What details do I need to provide the lending institution?
Do I need to provide cashflow and profit projections?
How do I forecast cashflow?
What are the alternatives in financing a business?
What type of security do I need to secure a loan?
Is it possible to borrow money unsecured?
Do I need to establish a credit policy for my debtors?
Do I need to keep debtor/creditor lists?
Is it acceptable to ask creditors for a discount for early payment?
The three primary sources of capital available to businesses are:
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Business angels are usually successful and wealthy people who are willing to invest in new businesses that they feel have a potential for growth and for being successful.
Venture capital is a pool of funds that is available for investment in high-risk/high-return situations (ie, those which are outside the scope of normal sources of financing). Venture capital is not usually provided as a loan, it is an investment in the equity of the company. Venture capitalists are prepared to wait for their returns and do not expect a company to be profitable from the beginning. They adopt a long-term approach, but at the same time they expect a higher than normal rate of return on their investment.
There are a few contact points for business angels and venture capital firms. They are:
Persons providing venture capital normally operate through a corporate structure. At present the number of venture capital firms in existence in Australia is limited, as is the amount of funds they have available. But as the market for such finance grows so should the pool of funds which are available for investment.
Working capital generally refers to the money required to fund the day-to-day running of the business.
Short-Term Finance - This is designed to cover a shortfall in the working capital. Short-term finance can typically come in the form of a:
Medium-Term Finance - This is finance usually required for a three to 10 year period. It is principally used to finance equipment, business expansion and development of new products. Medium-term finance can be in the form of:
Long-Term Finance - This type of finance is used to fund the purchase of assets such as the business itself, land, buildings, plant or machinery which will directly or indirectly contribute to profit over a period of years.
In most cases you will need to make an appointment with the lending manager of the financial institution. You will then be asked to fill in a loan application form and to provide details of your business or proposed business. When you are preparing the request for a loan it is essential to inform them of all relevant matters. This detailed information is required so that they can reach a decision and it may have a bearing on the type of finance, the terms and conditions. It is a good idea to prepare a business plan to take with you. Your local Business Advisory Service can help you prepare a business plan. The plan needs to be accurate and well researched.
When applying for a loan you will need to supply the following:
Do I need to provide cash flow and profit projections?
The financial institution will want to see what the anticipated earnings and expenditure of the business will be, so it is a good idea to include cash flow and profit projections. If you have prepared a business plan this should include your financial strategy, historical information, if you have it, and also your cash flow projections.
The first step in maintaining positive cash flow in your business is to forecast sales revenue. This involves estimating how many units you expect to sell and translating this into dollars. If your business sells part of its turnover on credit, you need to account for this in the periods you expect to collect the money; this will depend on how reliable your debt collection procedures are. Once you have established how much money is coming into the business, you need to make estimates of the expenses. The more accurate these projections are the easier it will be to plan for business growth.
Committing your own funds is often the first financing step; it is also the best indicator of how serious you are about your business. You may want to consider family members or a partner for additional financing. Banks and other financial institutions (finance companies, credit unions or venture capital firms) are the most obvious and common source of financing your business.
Most financial institutions require collateral such as your home. Generally, if you do not own your own home, or an equally valuable asset, it is very unlikely any institution will lend you money to invest in an untested business. Basically, they want to know what you can sell if the business fails. This is one reason why it is important to be fully aware of the risks involved in starting a business.
In some instances, it may be possible to borrow money unsecured, but generally the amounts available will be quite small and the interest payable will usually be higher. Some banks will structure this type of borrowing as a credit card facility.
Your debtors owe money to you. It is, therefore, necessary to establish a credit policy and to make sure that it is legally binding. It is also necessary to write your policy down and to make sure your debtors are aware of it. Prepare regular lists of debtors showing the name and the amount owed. Develop special follow-up rules for debtors and ensure they are applied. It may be beneficial to track "days to pay" as this may assist you to manage your debtors. Offering discounts for prompt payment can also help.
It is useful if you set up debtor and creditor lists. The best way to set them up is by having separate columns for the current, 30-60 days, 60-90 days and 90+ days. This way you can see who owes you money, to whom you owe money, how much is involved and when the money is due.
Yes, if you have the funds available pay creditors early to obtain discounts. If discounts are not offered ask for them.