How to finance your start-up?

A start-up requires more than just a good idea.

Approximately four out of five businesses will fail within their first five years of existence and, in most cases, it isn’t a result of poor skills or insufficient desire to succeed.

The top reason that any start-up fails is due to a lack of sufficient capital.

Business founders are invariably infused with a desire to build a strong, viable business but the reality is, most lack the financial skills to properly analyse the amount of cash they actually require to operate.

Most will find that there are costs they hadn’t thought of, such as outstanding debts and unsold stock. As such, the business may appear to be making profit on paper but actually has a large cash deficit. A successfully growing business will have increased amounts tied up in these different areas – working capital.

If businesses owners don’t have a clear understanding of it from the outset, they could be headed for trouble very quickly.

Planning your working capital

When considering launching your start-up, it is critical you seek advice from an accountant to help prepare a projected cash flow and budget. This may not sound exciting, but it will set you off on the right foot and could be the difference between success and failure.

An accountant will be able to help you get a clearer idea of the financial areas you need to concentrate on and how much funding you will need from the get-go to run a sustainable business.

Once you have established your real start-up capital needs, you then need to consider how to fund your business.

Put your money where your mouth is

In the past, a start-up could seek the assistance of the banks to help fund their business however, with the current state of interest rates and some economists predicting a recession, banks have all but shut up shop on their business lending.

Unless you are able to put up your house as collateral, they won’t be interested in granting you any credit. If you are willing to put your house on the line, they will usually be prepared to lend you up to around 80 per cent of the value of the property.

My advice though is to steer clear of the banks for anything other than short-term needs such as having a large order to fill but needing the cash for supplies, knowing the money is definitely coming in to repay the loan.

The safest way to finance a start-up is to invest your own money up to the level you are prepared to lose. Most entrepreneurs however won’t have this type of ‘risk’ money available, so investing themselves isn’t an option. This could mean it’s not the right time for you to be starting a business.

Divine intervention

If you haven’t got the cash on hand to invest yourself, the safest way to finance your start-up is to seek out an ‘angel investor’. This has become somewhat of a buzzword of late, however it isn’t a new concept.

Previously these were known as a silent partner; someone who will provide the finance for a start-up while the founder does all the work.

Finding an angel investor isn’t a simple process and you will need a clear and detailed business plan in order to convince them of your ability. They will want to see that you are committed to the company and have seriously thought through all the possible issues that could arise.

The best place to start looking for an angel investor is within your own network of family and friends. They will often be willing to lend you money towards your idea as they know and (hopefully) trust you.

If that isn’t an option, you will need to advertise. There are various websites that allow you to reach out to potential investors.

Start-up but don’t do debt

Whatever you do, do not rely on credit cards, personal loans or dodgy lenders. The repayments will cripple your business before you can even get your wheels turning.

Disruptive lenders, such as peer-to-peer lending, in particular should be avoided at all costs. As most won’t require capital to grant a loan, they will hike up their interest rate to cover the risk, meaning you will end up paying far more than the loan is worth.

These forms of financing are almost guaranteed to result in business failure and leave you with significant debt which could potentially expose you to bankruptcy.

Ultimately, financing your start-up comes down to adequate planning and a strong understanding of your business capital. With a solid foundation, your business will be set for a prosperous early life and you will be in a better position than most to grow and succeed.

Roger Mendelson is CEO of Prushka Fast Debt Recovery and principal of Mendelsons National Debt Collection Lawyers. Roger is also author of The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival Guide, both published by New Holland Publishers.