There is no doubt that the best position to be in is not having to borrow cash to start a new business. Interest payments reduce the profits of the business and capital repayments will burden the early cash flows. However very few people are able to finance their new business from their own funds.
Securing finance should not be difficult, if you follow a few simple rules. Finance can be obtained from a number of sources for your new business. These can include drawing down your own savings or pension funds, borrowing from family or friends and borrowing from commercial organizations such as banks and building societies. In most cases, it will be necessary to use a mixture of sources, as organizations will usually only lend to you if they see that you are prepared to risk your own money as well.
If you use your own funds, or get it from a bank or other lender, you must have a comprehensive feasibility study or business plan ready. Not only will this assist a bank in deciding whether or not to lend to you, it is an essential exercise that can tell you if a business is viable or not. A business plan is fundamental to any business starting up, and any lender should turn you away if you do not have one prepared.
The financial expectations of the venture will be presented in the business plan along with a full picture of the market conditions, size and number of competitors, resume of the promoters, threats and challenges to the business and sensitivity to any changes in the assumptions that have been made. Details like these are every bit as important as having an idea of the amount of money you want to make.
The lender will assess your business feasibility and the amount of money you are asking for. Generally they will then lend if the amount looks reasonable and the business plan is sound and indicates that repayments will be made comfortably. They will also seek some form of security over the loan they may be prepared to advance you.
Security can be given over any type of asset, from a property you own such as your house to the value of the debts your business may have. Normally the lender will want security they can easily realise if your business runs into difficulties and defaults on the loan. In some cases they will accept a personal guarantee from you or someone else, though any guarantor should have some financial standing for this to be possible.
A mortgage over your house can be used to raise funds, in which case a detailed business plan may not be requested by the lender. This is because they will feel safe by lending you say ninety per cent of a property’s value yet have security over all of it. This means that they can force a sale of your property to repay your debt and can sell at less than market value. In such cases it is just as important that you prepare a business plan for yourself as you must be satisfied that your business will work.
Remember that a lender will expect to make money from you when it advances you funding for your business and will want to minimise the risk it faces. Therefore, you should try to be as accurate as you can with your business planning and allow plenty of margin for contingencies.