Words by Charlie Wilson
For many start-up businesses, managing cash flow and gaining access to start-up capital will be the single biggest challenges you’ll face. Securing a business loan from a bank or financial institution can give you the security and peace-of-mind to help your business grow.
Starting your business, gaining customers and creating brand awareness takes time, which can mean long stretches of time between receiving payment for your work. For this reason, managing cash flow is key to the ongoing success of your new venture. The cash flow for your start-up business has to do with a few different things, which include the following:
- Accounts receivable is the money your business will receive from providing your customers with services and/or goods. These can be tangible goods customers can purchase, or something like consulting, which is a service you are selling. It is important to monitor your accounts receivable closely to ensure prompt payment and follow up with any customers who have not paid.
- Inventory are the actual materials and goods your business has on hand to sell to customers. If you sell goods, the goods are the inventory. If you deal in services, your inventory may be anything related to these services, such as pamphlets, booklets, or an occupancy rate in a restaurant. The inventory will fluctuate depending on supply and demand.
- Accounts payable means any short-term debts that you owe to creditors. This could be a business loan, payroll costs, or income taxes. Accounts payable can also include long-term loans, which may include the lease of your building or other debts that take years to payoff.
- Capital expenditures are funds that your start-up business may use to upgrade or purchase new physical assets. These could include equipment, buildings, or additional properly. Basically, capital expenditures are designed to increase the cope of your start-up operation.
- Borrowings and debt service is anytime you borrow money from a bank or other lending institution and go into debt. This money can be put towards your start-up business to help it grow.
Depending on the nature and size of your start-up, you may have to finance a small building or an office space, employee wages, materials, and provide yourself a living wage – all up-front, long before your work generates any income.
Funding your day-to-day expenses is not the only reason you might need finance your start-up. To grow your business, you will need to find new customers and create a brand awareness – and that means marketing, which can be both expensive and time consuming.
As your reputation grows, you may need to expand your office space, upgrade your technology, and hire more office staff to meet the increasing demands of your consumers.
There are any number of reasons why you might decide to seek financing for your business, but in each case the process is the same.
- Build a business case
It’s important that you have a business plan to support your application for a loan. The next step is to examine how a loan will help your business and whether the benefits will truly outweigh the costs. Finance never comes cheap, and doing this may even mean attracting terms and conditions that restrict the way you run your business. Check the numbers to be sure it will add value before you begin applying for the loan.
As part of this process, consider what sort of repayment schedule could work for you. Think about how much you can afford to pay in fees and interest before the loan costs more than the income it enables you to generate. This is vital preparation for the next step.
- Decide on the type of finance you need
Finance comes in many forms, each with different advantages, requirements, and costs. The right type of loan will depend on your purpose:
- If you need to boost your cash flow and finance your ongoing expenses, look for flexible short-term finance that will give you cash when you need it and only incur interest when in use.
- If you’re thinking of making a substantial investment, such as purchasing or upgrading technology, leasing an office space, or providing wages for employees, you will need to seek long-term financing with an affordable repayment schedule.
There are many different types of business finance that you can choose from, so it is a good idea to work with a financial planner, banking manager, or a combination of the two to help understand what type of financing is right for your business.
- Choose your lender
The biggest step in getting financing is choosing what type of lender you will receive the money from. This can either be a high-street bank or an alternative finance provider. The right choice really depends on what type of business you are doing, but one important thing is to have an established credit and banking history at a reputable institution. The bank will look at your ability to repay loans and how you have handled money in the past, so it is important to have an established account before you apply at any lender.
Banks tend to offer lower interest rates and provide better solutions than alternative lenders. Banks have worked with all types of businesses in the past, so they will be able to recommend the best financing for your business needs. It may take a little time to get approved by a bank, but this is because they do a detailed check before lending out money.
The biggest drawcards for alternative lenders are speed and flexibility. They generally require less documentation, have more relaxed criteria, and make decisions much more quickly – sometimes approving applications and providing funds within as little as a couple of days.
The downside? Cost (sometimes including hidden fees and penalties), and the risk of unreasonable, restrictive terms and conditions. Be sure to read the fine print so you know exactly what you’re signing up for.
If you’re in any doubt about the right type of financing for your start-up, the most suitable lender, and the differences between the hundreds of loan products, seek professional advice. A financial advisor or banking manager can also help you prepare your application and structure your loan to suit your particular business and tax position. Furthermore, they will tell you the exact terms and conditions to you know just what you are signing up for.
About the Author
Charlie Wilson has been living and working all over Australia collaborating with other freelancers and start-ups. His background and success in small business has equipped him with a vast network of contacts and broad range of experiences within the Australian entrepreneurial scene. If you would like to hear more from Charlie, you can find him on Twitter